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Humphreys, Alexander 


Lecture notes on some of 
the business features of... 


[Hoboken, N.J.] 









Humphreys, Alexander Crombie, 1851- 

Lecture notes on some of the business features of en- 
gineering practice, by Alex. C. Humphreys ... [Hoboken, \ 
N. J.] Department of business engineering, Stevens insti- 
tute of technology, 1905. 

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Business Features 





President of the Stevens Institute of Technology 


Stevens Institute of Technology 












V V V 


INTRODUCTION. President Humphreys 5 

THE POINT OF VIEW. Mr. Walter C Kerr. .... 7 

NOTES ON CONTRACTS. Mr. Howard E. White. ... 16 

GENERAL NOTES. President Humphreys 48 

ACCOUNTING. President Humphreys. . . . . . .57 

ACCOUNTING (Continued). President Humphreys. ... 71 

ACCOUNTING (Continued). GENERAL NOTES. President 

Humphreys gg 

REPAIRS AND DEPRECIATION. President Humphreys. . 96 

President Humphreys j,, 


(Continued). President Humphreys '. . i^q 




phreys -- 

ANALYSIS OF DATA. President Humphreys 169 

phreys ,-^ 





In this department the students are first required to read the 
"Reprints of Lectures and Papers" which were gathered together 
for the purpose of cultivating in them a more sympathetic atti- 
tude of mind towards the specific instruction which is in part cov- 
ered in these lecture notes. 

In writing these notes and in putting them together I have 
made no attempt to avoid repetition, but my aim has been rather 
to consider the same proposition from several points of view in the 
hope that I might so better remove the difficulties that have de- 
veloped in the work of the class-room. 

Experience with three senior classes has convinced me that 
this repeating and paraphrasing is required to enable me to give 
inexperienced students a firm grasp of the essentials included in 
my course, unable as I am, by reason of insufficient time, to 
afford them the advantages of extended practice in examples. 

The actual repetition is far greater than is here indicated, for, 
in my lectures as delivered, I give many additional examples from 
my own experiences, selected to meet the difficulties of the stu- 
dents as these difficulties become apparent. 

I do not hesitate to include commonplaces. My hope is that 
especially where these have to do with the ethics of our noble pro- 
fession the members of my classes will, through a cultivated re- 
ceptivity, come to accept these commonplaces as active and con- 
trolling truths. 

These pages are placed in the hands of the students so that 
they need not be obliged to rely solely upon my spoken words, 
but may have something to study outside of the class-room in 
preparation for examinations. 

Notwithstanding the fact that I have not been able so far to 
cover by written notes all of the matter included in my course, 
I feel that the students should be able to prepare on all I present 
because much that is most difficult to comprehend is here given 


6 Business Engineering. 

in permanent form and the remainder I give them full oppor- 
tunity to discuss with me in class. 

The notes on the Law of Contracts were prepared at my re- 
quest by my friend and counsel, Howard E. White, Esq., of the 
New York Bar, to whom I wish now to repeat my grateful ac- 

The commencement address to the Class of 1904, delivered 
by Walter C. Kerr, Esq., would have been included more appro- 
priately in the "Reprints of Lectures and Papers," but as this was 
not feasible I have reprinted it here that Mr. Kerr's sound advice, 
so admirably presented, may be preserved for future classes. 

I hope that I may be able to develop from these and supple- 
mentary notes a text book on the business features of engineenng 
practice, based upon my experiences in the fields of Engineering 
and Business as to the matter, and upon my experiences in the 
classroom as to the most efficient methods to be employed m 
presenting this matter to engineer-students already pressed for 
time in which to perform their assigned tasks. 

Alex. C. Humphreys. 

The Stevens Institute of Technology, 
hoboken, n. j. 


(Address to the graduating class delivered by Walter C. Kerr, 
Esq., at commencement exercises of Stevens Institute of 
Technology, June 16, 1904-) 

It is a pleasure to talk to a lot of young men who are about 
to become engineers. It was not so long ago that I came to your 
age less well prepared, perhaps, than any of you. When I look 
back at the engineering education through which men of my time 
were launched, and then consider the training you have had and 
the opportunities before you, I have reason to wonder why I am 


I hesitate to advise you. You have already had so much 
advice that I do not know whether you can hold more. What I 
can say in a few minutes will amount to little, so let me use these 
minutes to suggest that you advise yourselves along certain lines 
which I will propose by way of point of view. If you look 
straight you will see straight. You cannot think wrong and act 
right. Your perspective will be distorted if you haven't the right 

point of view. 

You are leaving a good institution for a good world. Your 
Alma Mater has built up around you excellent facilities for giv- 
ing you what you need, and other institutions have likewise cared 
for their own. 

The so-called liberal education has always been highly aca- 
demic. Trade school engineering has been strictly non-academic. 
The two have joined hands fortuitously in our modern mstitu- 
tions. The liberal education has become less and the technical 
more academic, with advantage to both. There is, however, dan- 
ger of engineering education growing too academic, for several 
reasons: One is the disposition to include in technical training 
a liberal education, which of itself is not undesirable. Another is 
that engineering professors often lean unduly towards academic 
views and processes, and thus lose touch with the spirit of the 


Business Engineering. 


engineering world. Greater than either of these is the tendency 
of all things to move in the line of least resistance, and all learn- 
ing which depends upon the intellect alone is more easily acquired 
than that which depends upon other sources. The proof of this 
need go no further than to remember that no literature is finer 
than that written two thousand years ago; no philosophy has 
fundamentally improved upon that of the ancients; the highest 
flights of intellect and mathematics were reached during the ages 
in which the world was observed to be composed of four elements 
— earth, air, fire, and water. 

A review of knowledge shows the great preponderance of the 
intellectual over the material, and it is only within late centu- 
ries, in fact almost the past century, that the human mind has 
seemed capable of turning from the lesser resistance of intellectual 
attainment to the greater capacity for physical observation and 
comprehension. We have but recently come to the era of intense 
mental operations, dealing with laws and principles which require 
insight greater than the intellect can grasp unless aided by the 
senses. Contrary, therefore, to common belief, I assert that the 
highest refinement of knowledge follows from the highest use of 
the senses ; and that it has taken thousands of years of pure intel- 
lectual development to attain a state in which the powers of nature 
can, through the human intellect, be made useful to mankind, 
and add largely to knowledge. Do not, therefore, get a wrong 
view of the faculties involved in science, in the application of the 
laws of nature, applied mechanics, and the powers of comprehen- 
sion which underlie engineering. There is still room for doubt 
—not debatable here— as to what constitutes liberal education. 

I hope for the time when the spirit of engineering as found 
in practice will form a more definite part of engineering educa- 
tion. This, I think, must come through the professor keeping in 
close practical touch with the engineering worid. There are vari- 
ous ways in which this may be accomplished, but I know of none 
better than by each professor doing a reasonable amount of prac- 
tical work for commercial purposes. Under some conditions, this 
may be consistently accomplished during a portion of the time, 
but I am inclined to think that eventually our professors will de- 

Lecture Notes. 9 

vote all their time to instruction while they teach and go period- 
ically into the worid, a few years at a time, for practice. Thus the 
professorial life would not be so exclusively educational, and our 
growing engineering institutions may be enabled to enlarge their 
faculties by the devotion to teaching of a portion of the time of 
men who are primarily engaged in commercial work. 

Now that you have your so-called education, what are you 
going to do with it? I cannot tell you, but I can suggest some 

points of view. 

Begin by forgetting yourself. All thought of self is some 
form of selfishness, and selfishness never produced anything bet- 
ter than more selfishness. It often breeds something worse. 
Genius is all right in its way, but it will not do your work. Get 
a right idea of work. Remember that time is the essence of most 
things, and is not inconsistent with thoroughness. 

We hear much about opportunities. They are everywhere 
plentiful. Remember that your opportunity is the little one that 
lies squarely in front of you, not the large one which you hope 
to find further along. Many a man is surrounded with opportu- 
nities who never seizes one. There are traditions that Adam, 
William Tell, and Sir Isaac Newton each had an affair with an 
apple, but with different results. 

Your first duty is always to that which lies across your path. 
The only step which you can take in advance is the next one. 
This leads to a simplicity of action which is commendable. Don't 


The refinement of thought which is apt to follow high train- 
ing often leads the mind to overiook simplicity and to even seek 
complexity. The wealth of modern appliances tends likewise ; and 
it is thus easy to acquire that over-refinement, often termed theo- 
retical, as against the simplicity which is called practical. 

From one point of view all gradutes can be divided into two 
classes : those who think their knowledge is a little long for their 
opportunities ; and, those who think most anything is a little long 
for their knowledge. Both are apt to think that the knowledge 
they have acquired will become the essence of performance. You 
will soon find that knowledge hasn't much to do with effective- 


Business Engineering. 

ness. It is necessary, only as words are essential to the expres- 
sion of thought. You will find knowledge a good tool, but not 
the vital force with which you perform. You will fall back upon 
human effort and action, and find that it is the human-engine and 
not the knowledge-engine that does the work. 

Cultivate singleness of purpose. This is more important than 
you may think. It is intuitive with the comparatively ignorant, 
and often absent in the highly trained. We are frequently sur- 
prised at the great competency of the ignorant contractor or fore- 
man, on whom judgment is often passed by saying that he is a 
practical man and gets results. Analysis will show that his best 
quality is singleness of purpose, which leads him to vigorously do 
the one thing before him, without distraction following from 
knowing or thinking about too many other things. The broaden- 
ing power of education and training increases the range of con- 
templation, but unless the power of concentration is cultivated 
there follows a tendency to scatter instead of to acquire that sin- 
gleness of purpose which leads to effective action. David Starr 
Jordan has said : "The purpose of knowledge is action. But to 
refuse action is to secure time for the acquisition of more knowl- 
edge. It is written in the very structure of the brain that each 
impression of the senses must bring with it the impulse to act. 
To resist this impulse is to destroy it. * * * This lack of 
balance between knowledge and achievement is the main element 
in a form of ineffectiveness which, with various others, has been 
uncritically called degeneration." Thus President Jordan shows 
how even much more than a little knowledge may be a dangerous 
thing. The highly-trained man therefore needs, as a complement 
to his training, unusual powers of concentration, in order that the 
virtue of singleness of purpose may not be lost. This faculty a 
man must have or acquire himself. It is not in the books. It 
cannot be taught. It can only be suggested by precept and ex- 

From directness of purpose naturally follows diligence in 
getting what you go after, and not being easily turned aside by 
resistance. When you are getting what you go after, get it all. 
Avoid the mediocrity of compromise. Be thorough and stand 

Lecture Notes, 


for full competency in everything, from main essentials to details. 
Just so far as education, assisted by concentration, contributes to 
singleness of purpose it is useful, but where by length, breadth or 
depth it dilutes human effort, it lacks value. It is, therefore, not 
so much the question how much educational training you have as 
it is how you use it. Some can use a little with great effect, be- 
cause their point of view is right ; others scatter so badly that they 
cannot use their knowledge at all; while some distorted mmds 
seem to have a faculty for misapplying a large amount of acquired 
knowledge through complicated processes full of error. To be 
right, you must be lOO per cent, right. Charity may pardon 
human nature its percentage of delinquency, but this is a human 
matter. The laws of nature, mathematics, and engineering do not 
pardon anything. The man may therefore be absolved from 
censure, but his work must stand the rigid test of inviolable law. 
Nor is it too much to say that you must be right the first time. 
Much of our engineering is only done once, and it must be done 
right that once. A man who has learned by experience to do a 
thing deserves no credit for doing it right. He is then only a 
repeating machine. Real power is characterized by ability to 
perform right the first time that which a man never did before. 
Such performance involves the power to assimilate and adapt ex- 
periences, of more or less like or unlike kind, in a way to bring 
forth correct results. This is the true use of experience, wherein 
a man is a thinking, active power, and not a mere repeater. ^ 

Clearness of thought is an essential often lacking. This, too, 
follows from concentration and singleness of purpose. Many 
minds confuse themselves with a wealth of ideas, grading from 
the well formed to hazy, indistinct conceptions. You can clear your 
mind by proper habits of thought. Train yourself to separate es- 
sentials and non-essentials and confine your consideration to the 
essentials ; to distinguish between what you know and what you 
only vaguely surmise, clearly eliminating opinion from facts. 
Nothing is more helpful than conference with yourself, in which 
you determine what you think of your own thoughts. This is 
aided by the moderate cultivation of system— thinking in an 
orderly manner, beginning at the beginning, ending at the end. 



Business Engineering. 

Lecture Notes. 


and being sure to have a middle. With this there should be no 
slavery to system, but let each find his own logical way. 

Besides what are commonly known as ideas, men have intui- 
tions — sometimes called impressions or opinions — which they 
cannot readily prove. These I believe are identical with reason, 
except that while reason is composed of a sequence of distinct 
ideas, each capable of expression, intuitions follow from the 
capacity of the human mind to integrate small ideas and im- 
pressions, each of which is too small to stand alone, or to be 
readily expressed, but which integrated form a concrete mental 
impression, called an intuition, and which is of exactly the same 
character as reason, except that it is composed of smaller and 
almost intangible units. Do not, therefore, discard intuitions as 
inferior to reason. Analysis will sometimes develop intuition 
into an expressible logical thought. 

You have all had ideas and you will have more of them. 
Some ideas seem bigger than others. These mental forces, like 
other forces, only do work when in motion. Hence your ideas 
are only valuable when put into execution, and this often re- 
quires more talent than to originate them. Some men seem to 
consider their ideas so good that they will execute themselves. 
A point of view is involved in the power to rationalize. This 
again is a thing which each man does for himself in his own 
best way, and its essence consists in asking one's self whether 
the thing is reasonable. It is a great check upon error. It ap- 
plies equally to nearly everything of which engineering is com- 
posed. It is the power of the human mind, after performing 
in more or less systematic and conventional ways, to stand off 
and look at results and ask one's self whether they are reason- 
able. One man will figure that certain material weighs two 
hundred tons, and believe it. Another will say that there is 
something wrong in that, for it all came on two cars. 

Every young man comes sooner or later upon a dilemma, in 
which he is more or less drawn in opposite directions by his 
confidence on the one hand and timidity on the other; a desire 
to perform backed by the courage of his convictions, but on the 
other hand resisted by his inability to see his way through in 

orderly progression to a desired end. This is about the time 
to show your nerve. Don't be dazed and baffled, but make a 
start. Use your wits and you will get somewhere, and if you 
cannot always see the end it will constantly get nearer and 
plainer when you go as far as you can see and then see how 
far you can go. 

Another point of view concerns engineering expression. 
This may be through designs, drawings, mathematical determina- 
tions, or words, and finally by work done. The lamest of these is 
words. All engineering is so non-literary in character that the 
use of language is too much neglected, leading to expressions 
that do not properly convey thought. In engineering, it is not 
rhetoric but diction that makes expression clear, and diction is 
best learned from the dictionary. It is well for a young engineer 
to cultivate his vocabulary, and learn to use words in their right 
sense. They are then usually understood, even by those who 
have less knowledge. A word of caution, however, against as- 
suming that a lack of facility of expression can cloak an absence 
of knowing what you think. Engineering documents, specifi- 
cations and letters are full of mis-statements due to the careless 
use of language. Conciseness cannot be over-estimated. Brev- 
ity is desirable, but not at the expense of clearness. Conversely, 
a certain degree of facility should be acquired in reading the 
words of others. Some seem incapable of understanding plain 
language when spoken or written. Anyone persistently failing 
to understand the language of others has limitations needing cor- 

One of the worst attributes in engineering, and which is 
fundamentally born of conceit, tends to fasten error, censure, and 
responsibility on others. There are times when a man needs to 
stand himself up in front of himself and ask: What is the matter 
with me? The capacity of any man to admit his own error and 
frailty of judgment is a measure of strength rather than weak- 

Perhaps no personal attributes are of greater importance in 
the conduct of the business affairs of an engineering life than 
good cheer and non-contentiousness. Not only because these 



Business Engineering. 




are right and agreeable, but because they enable a man to work 
better, to be better understood, and they add weight to his opin- 
ions. There is a certain reasonable optimism of manner which 
makes a man and his ideas welcome, even though they must of 
necessity sometimes be critical. To vote ave and believe that 
things can be done makes a man helpful to others and to enter- 
prises. Discontent is not a sign of progression. 

Each of you probably has a preconceived notion of following 
some line of engineering. Be careful about your self-analysis. 
Ihe field IS large and has room for all of the various types of 
men,, some of whom incline to constructive operations, others 
toward inventive, some to the contemplative. Again, within all 
these divisions, some tend towards professional and others trade 
work. No one can advise what is best for you. This you must 
find out for yourself. I cannot help, however, a certain predilec- 
tion in favor of a young man being just an engineer, and not 
any particular kind of an engineer—not specializing while too 
young, but developing along versatile lines, ready to turn his 
hand equally well to any task within his general scope. In this, 
there is a good deal in the point of view, and the man who be- 
lieves he can apply himself in one direction about as well as 
another will come nearer doing it than one who thinks he cannot. 
When you start your practical work, you will doubtless try to 
improve things. That is a legitimate purpose, if not overworked 
I am not going to attempt to tell you what needs improvement, 
but the one improvement that most things need is in the line of 
sufficiency. You can think this over for yourself and apply it 
where it fits. 

There is another point of view seldom considered. It relates 
to environment and the power to vary. It is pertinent to engi- 
neering. Man ascended through and exists under the laws of 
an organic evolution, which occurred almost entirely in early 
geological ages, under water, within a few miles of shore, under 
substantially constant temperature, constant pressure, and uni- 
form food supply, and thus in about the simplest possible envi- 
ronment. It was caused, primarily, through the force known as 
the power to vary, and the reason that evolution spanned the 

Lecture Notes. 


space from the simple cell to the vertebrate animal in so short 
a time was that this power was not resisted by complex environ- 
ment. When organisms emerged from the water to the more 
complex environment of the land, and as environment grew con- 
stantly more intricate, its resistance retarded evolution and re- 
sulted in fixation of species until ordinal evolution practically 
ceased. It is the complexity of the environment of the world 
that presses upon you and tries to hold you back from the ex- 
ercise of your native power to vary. A good environment is 
certainly less harmfully resistant than a bad one, but remember 
that environment is not a force. It is not a producer. You are 
the producer. Whatever be your power to vary, environment 
will only resist and reduce it. 

Therefore, remember that all the good you accomplish is go- 
ing to come out of yourself. You cannot borrow it and you 
cannot make it out of that which has been poured into you by 
education or otherwise. All that you receive is only a certain 
quantity of knowledge, acquired by education, experience, or 
other training, which will have a certain influence upon what 
comes out of yourself as your own. It is the inherent capacity 
to perform with your own brain which will make you what you 
become, and not the mere transmission of that which you have 
acquired. Your knowedge, therefore, is of little avail until you 
make it inherently a part of yourself through mental assimilation 
and utilization. The clearer you comprehend these things, the 
more readily you can make use of them as against the process 
of mere acquirement with a vague motive that in some way 
or other what you acquire may be of benefit, or that environment 
will be the force that makes your talent effective. Some have 
gone through experience without acquiring it, and many a man 
who has received an education has not got any because he al- 
lowed it to be a thing apart from his personality and it slipped 

■'mi mmmm y^mmi^Mmsm^-j:- 

Lecture Notes. 


I I 



(Prepared by Howard E. White, Esq.) 

Law is concerned with the exposition and application of 
those principles which regulate the relations of man to man. 
Criminal law prescribes and enforces the duties which man owes 
to the State and to the public as a whole. 

Civil Law deals with the private relations of individuals be- 
tween themselves, and finds its chief end in preventing the occur- 
rence of differences in the manifold activities of civilized life, or 
of adjusting such differences as shall have arisen. Law, in its 
broadest sense, is based upon a very few elementary principles of 
justice, fairness and equity, which may be as well and easily 
understood by the layman as the lawyer. The technical niceties 
and refinements of the law have to do with the application of 
these principles to concrete cases, and require a lifetime of unre- 
mitting research and study. They are the special province of the 

No layman, however talented, is qualified to master these 
legal intricacies, but no one, however small his business, can fail 
of benefit from a consideration of general legal principles. The 
more widely they are understood and heeded in carrying on the 
everyday affairs of life, the less chance there will be of entangle- 
ment in tedious and expensive litigation, which may, whatever its 
outcome, ultimately ruin the most prosperous business or cloud 
the success of the most talented individual. 

It is a matter of common experience to see men, eminent in 
their own specialties, so ignorant of business and its methods as 
to fail of success when they attempt to practically apply their 
knowledge and talents. 

The object of these notes is not to attempt to impart knowl- 
edge which will enable a layman to become his own lawyer, but 

rather to instill a knowledge of the legal necessities of business 
life, and to make possible the formation of a correct judgment as 
to when legal aid should be retained. 

Money wisely spent for competent legal assistance, when 
large projects are in their inception, is likely to save the expen- 
diture of a much larger sum in an attempt to correct the disas- 
trous result of a careless or improvident act. 

The Law of Contracts Important to Business Men. 

A generally accepted classification divides the body of legal 
principle into two parts : 

1. Those which concern Torts. 

A Tort is the violation of some legal duty owed by one indi- 
vidual to another and existing independently of any contract. 

2. Those which relate to Contracts. 

While some lawyers make a specialty of the former class, in 
which are comprised suits to recover damages for personal inju- 
ries, by far the larger number of attorneys are concerned almost 
exclusively with the second branch of the law. 

Varied as the activities of modem civilization have become, 
it still remains true that, broadly speaking, the life of the average 
business or professional man is for the most part concerned with 
making and performing contracts. In the last analysis almost 
every action of the day brings us within the reach of some con- 
tract, express or implied. 

Some knowledge of contract law, therefore, is a fundamental 
necessity to everyone.. 

What Is a Contract ? 

This seems a simple question and one to which almost every 
layman feels competent to respond. An attempt to do so, how- 
ever, shows how difficult it really is to frame a definition suffi- 
ciently broad to cover the multitudinous varieties of contracts 
which are legally possible. 

Almost as many definitions have been given as there are con- 
tracts. A sufficiently simple and non-technical one is as follows: 

An agreement, enforceable at law, creating an obligation not 


Business Engineering. 

Lecture Notes. 


theretofore existing, upon the parties or some of them, to do or 
refrain from doing some lawful act, in return for value received. 
The most important feature of a contract is, of course, that it 
is the basis of some new agreement. It is creative, and by it the 
parties voluntarily assume obligations from which they were for- 
merly free. The importance of a contract, from the standpoint of 
law/arises from the fact that, whereas it is created by the volun- 
tary act of the parties, once made, it will be enforced by the courts, 
as strictly as though its terms were a part of the statute law of 
the State. The very freedom given by the law in respect of con- 
tracts imposes upon the contracting parties the necessity for an 
added measure of caution. The Courts extend no protection to 
the maker of an improvided contract. When it has once been 
signed the obligations imposed by it are as binding as though its 
terms were of the most advantageous character. The law sup- 
poses that in making contracts the parties themselves are best 
qualified to fix its terms, and, though these may at a subsequent 
date prove oppressive, the law will extend its utmost aid to their 
enforcement. The inviolability of contract rights is most jeal- 
ously guarded by the law. The Courts are called upon to con- 
sider more cases arising out of contracts, than from any other 
source. Out of the infinite variety of private agreements entered 
into arise an infinite number of variations in the application of 
established principles. To cope successfully with the niceties of 
interpretation the lawyer must be possessed of acumen, persever- 
ance and genius. This is the technical side of law. 

Executed and Executory Contracts. 

Contracts are divided as respects the time of performance 
into two major classes. 

1. Executed. 

2. Executory. 

In the first class are included those contracts which are per- 
formed, substantially at the time when they are made, or so short- 
ly after as to make the whole transaction simultaneous, as in the 
case of a purchase of merchandise followed by immediate de- 
livery. The agreement as to price constitutes a contract, which 




is immediately executed or performed as the buyer departs bear- 
ing his purchase. 

An executory contract is one in which a substantial lapse of 
time occurs between the making of a contract and the carrying 
out of its terms. 

It is to the executory contract that we usually refer when we 
popularly speak of a contract, and it is with that branch of con- 
tract law that the present notes are concerned. 

A large number of the contracts entered into are performed 
without differences between the parties. But it is certain that 
no contract should be made in any spirit of fancied security aris- 
ing from this fact. The best of friends and the closest business 
associates are prone to disagree, and the better the friendship and 
the closer the association, the severer the breach. Every con- 
tract, therefore, which involves future performance should be 
regarded with respect to its ability to stand the test of such a 
disagreement and its consequent construction by the courts. It 
is obvious that the more distant the time of full performance the 
more chance there is for misunderstanding and difference. 

Express and Implied Contracts. 

It is important to remember that not all contracts are re- 
duced to writing, or even orally phrased. It sometimes happens 
that a man by his acts, perhaps unintentionally, involves himself 
in certain obligations which he little suspects. This fact gives 
rise to another subdivision of executory contracts into 

1. Implied Contracts. 

2. Express Contracts. 

I. An implied contract is a relationship, which springs unbid- 
den from the surrounding circumstances. Certain civil acts a 
man cannot commit unless he would accept the consequences. 
Thus, if a merchant delivers goods to a prospective customer, 
without order, and the recipient retains and makes use of such 
goods, the law implies a promise or contract to pay for them. 
Possibly the customer was ignorant of the law, and never in- 
tended to pay for what he used, but he may be forced to do so. 

I i 


Business Engineering. 

This is the simplest example of an implied contract, but it often 
happens that very complex problems are presented when the 
question arises as to whether an individual has not made him- 
self liable to certain obligations by a course of dealings which 
he never intended should have such a result. 

An implied contract is a pitfall to the unwary, and is referred 
to here by way of warning. Luckily there is a plain danger sign 
posted at its margin, obedience to which will prevent danger. It 
lies in the business maxim: "Do not expect to get something for 


It may sometimes happen that this law may be violated and 
the offender escape scot-free, but its disregard always raises the 
danger that having received benefits under the impression that 
they need never be paid for, the law will step in and insist upon 
a just compensation. 

It is always safest to ask, when in receipt of obvious bene- 
fits: What do I give in return? Not only is this true in respect 
to financial matters, but as well in matters of favor. One who 
grants a favor will some day expect one, and generally two, in 


2. Opposed to the implied agreement is the Express Con- 
tract, with which we shall chiefly deal. 

An Express Contract is one, as its name implies, which is 
framed either orally or in writing, with the intent by the parties 
to enter into a valid binding agreement. 

Examples are so common as to need no especial mention. 

Written and Oral Contracts. 

Except in instances especially covered by statutory enactment, 
a verbal or oral contract is exactly as binding as one in writing, 
if its terms be sufficiently proved. The attempt to do so is often 
involved in insurmountable difficulty. For this reason, if for no 
other, the question of oral contracts may be briefly dismissed 
with the statement that they should never he entered into if they 
can possibly be avoided. They are always dangerous and give 
rise to more litigation and discussion than can well be measured. 

Insist that every agreement made should be reduced to writ- 


Lecture Notes. 

ing, if only in the form of a memorandum, 
trouble be avoided. 


In this way only can 

Statute of Frauds. 

Some contracts must by statute be in writing in order to be 
valid. Thus, in every jurisdiction will be found statutes known 
as the Statutes of Fraud, which are practically uniform everywhere, 
and are to the effect that all contracts for the sale of property 
in excess of a specified amount in value ; contracts which are not 
to be performed within a limited time, and contracts to become 
responsible for the actions of another person, must be in writing 
and signed by the person to be charged. The reason for such 

a statute is obvious. 

Before passing to a consideration of the essentials of a con- 
tract, a word is proper as to the expression of its terms. 

Many words do not mean a good contract. Still less does an 
excess of legal terms or phraseology. The best contract is the 
simplest both in form and language. As in every other written 
instrument, brevity should be sought, though not at the expense 
of clearness of expression. If, therefore, a contract is presented 
for signature, the meaning of which is not absolutely clear, signa- 
ture to it should be refused. The word of an associate, or even of 
an attorney, that a certain unintelligible phrase has a definite 
meaning, is insufficient. If it be found that there is room for a dis- 
cussion as to the meaning of a word, it should be remodeled at all 
hazards until there can be no two opinions as to the intent. 
The habit of careless expression leads to more ambiguity in con- 
tracts than any other one cause, and it is absolutely without ex- 
cuse. The layman falls into the error through carelessness or 
inadvertence. At times the lawyer is equally negligent, but it also 
frequently happens that a lawyer attempts to draw a document so 
artistic in its brevity and conciseness that he sacrifices, more or 
less completely, clearness and common sense. But on the other 
hand one should not be misled into thinking that the best lawyer 
is one who draws the most elaborate or impressive contract. The 
reverse is apt to be the case. When one receives from an attorney 
a contract which appears to be so simple that it seems that it 

I ^ 


Business Engineering. 

might well have been drawn without legal assistance, it is certain 
competent counsel has been retained. 

The foregoing statements have been, for the most part, ex- 
planatory and analytical. We now pass to the essentials of a 
contract, written or oral. 

Essentials of a Contract. 

1. Parties capable of contracting. 

2. A lawful subject matter. 

3. A definite, clear offer. 

4. An unequivocal acceptance. 

5. Complete agreement of parties. 

6. Valid consideration. 

I. Parties capable of contracting. 

Every person who- has attained legal age ; who is under no 
civil or mental disability, temporary or permanent, and is free 
from compulsion, is capable of entering into a valid, binding con- 

In explanation of the foregoing the following should be 

noted : 

Person. — The word person includes corporations and women. 
Corporations, however, must act within the scope of their char- 
ter powers. At common law married women were deemed inca- 
pable of contracting, but by statute in practically every jurisdic- 
tion this disability has been removed, and they may contract with 

entire freedom. 

Legal Age. — By practically universal enactment the period 
of infancy terminates, for both man and woman, at twenty-one 
years. In some few jurisdictions women are deemed of age 
at eighteen. Local statutes should be consulted upon the point. 

A contract made by an infant is not absolutely void, but 
may be avoided by the infant, who cannot, against his will, be 
forced to perform it. There are only two exceptions to this 
rule : One is that an infant may be compelled to pay for necessi- 
ties furnished for maintenance or support. The other is that 
infancy is not a ground for breaking the marriage contract. It 
must be remembered, however, that if the infant be willing to 

Lecture Notes. 


abide by the terms of his contract he can enforce performance 
from the other party thereto. In other words the defense of 
infancy is only available to the infant himself. A contract made 
with an infant during his minority may, however, ripen into a 
valid and binding contract when the infant becomes of age, pro- 
vided, either expressly or by implication from his actions, he rati- 
fies it after that time. Thus, if an infant makes a contract, and 
after becoming of age accepts benefits under it, it will make the 
contract a good one. The infant is under obligations if he wish 
to disaffirm his contract to do so within a reasonable time after 
he becomes of age. If he fail to take such action it is an implied 
ratification of his prior contract. 

If the infant elects to rescind his contract he must, so far as 
possible, return all benefits which he has received thereunder. 
Should he fail to do so, he cannot escape liability upon his agree- 
ment. The general view, however, is that the infant is not pre- 
cluded from rescinding his contract when he becomes of age by 
reason of the fact that it is physically impossible for him to re- 
turn benefits thereunder. It sometimes happens that a contract 
has been partially performed during infancy, and that the minor 
has received some advantage therefrom. He may have received 
a sum of money for a piece of property sold by him, and have 
spent it before becoming of age. He may, nevertheless, recover 
the property from his vendee. 

At first glance this appears to be a hardship, and it is a 
doctrine whch is frequently criticised by laymen. It is founded, 
however, upon the very reasonable idea that one who deals with 
an infant, does so at his peril, a minor being in the eye of the law, 
not competent to protect his own interests. The law takes care 
of this anomalous situation by allowing the appointment of a 
guardian for an infant, and through such guardian the infant 
may make all contracts which are necessary for his best 

Civil Disability. — In England and many of the United States, 
criminals convicted of felony, are debarred from exercising civil 
privileges. Imprisonment for life is accounted civil death. 

Mental Disability. — Mental disability may be either partial 


Business Engineering. 

Lecture Notes. 


or total, permanent or temporary, and arise from permanent or 
acute causes. 

One whose mind is clouded to such an extent as not to 
understand the nature of the act, is deemed incompetent to con- 
tract, whether such condition proceeds from insanity, intoxica- 
tion or the use of drugs, and such contract is avoidable at the 
option of the person so incapacitated. While the rule, like some 
others stated herein, is occasionally modified in some jurisdictions, 
the prevailing rule in the United States has been given. 

Compulsion. — A contract cannot be enforced against a person 
who is induced to enter into it by threats of personal injury to 
self or family, or of illegal detention or injury to property. 

The foregoing considerations are somewhat technical ; but 
they have been stated as simply as possible. For practical pur- 
poses, the most important points to remember, are the disability 
of infants and the limitation of the power of corporations. No 
important contract should ever be made with a corporation with- 
out legal assistance to discover first, whether the corporation has 
power to make the agreement, and second, whether such con- 
tract has been duly authorized by the directors, and authority 
delegated to the officer who attempts to bind the company. 
2. Lawful subject matter. 

It is the policy of the law to allow the utmost freedom of con- 
tract, and no limitation is placed upon the right to contract save 
only that a contract may not be made to do an act which is for- 
bidden by law, or one which is opposed to public policy. Thus, 
one cannot contract to erect a building in violation of the build- 
ing law, nor to commit a felony or a misdemeanor. It is usu- 
ally simple to determine whether the object which it is desired to 
effect is forbidden by law. It is not always easy to determine 
whether the object is contrary to public policy. Cases fre- 
quently arise which appear to be innocent upon their face, and 
which to the lay mind seem to have no bearing upon any indi- 
viduals other than the parties to the contract themselves. Upon 
a closer inspection, however, it is seen that they affect the under- 
lying principles upon which is based our system of government. 
Thus, it is the policy of the law that every man should be free 



to earn a living as he will; that trade should not be unduly ham- 
pered or constricted; that gambling should not be encouraged, 
that necessities should not be monopolized or the price thereof 
unduly inflated. An agreement to do any of these acts is re- 
garded in the light of a conspiracy and will not be enforced by 
the court. In many cases one who is not a party to the con- 
tract may prevent the carrying out of its provisions, if harmed 
thereby. It will often be found that this question of public pol- 
icy will confront those who are considering contracts to restrict 
the use of patented articles, or to limit the area within which 
parties to the contract may practice their profession. These 
questions are always troublesome. 

3. Definite Offer. 

All contracts are based upon an offer by one of the parties 
and an acceptance by the other. These are the preliminary 
steps, and present a variety of interesting questions. Thus, one 
offers to work for another and the contract is concluded by the 
acceptance of the proffered services. 

The offer must be definite and, generally speaking, to a de- 
finite person. A vague offer makes either no contract at all, or at 
most, a very unsatisfactory one. In the interest of definiteness 
and clearness as a preliminary to a contract, the following warn- 
ing may seem to be timely: A neglect to consider it is at the 
bottom of a large percentage of the difficulties arising out of con- 
tracts. One who proposes to make a contract must come to a 
clear understanding with himself in respect of what he really de- 
sires to accomplish. If he has a hazy, indistinct idea of the obli- 
gations which he is about to assume, or of those which he de- 
sires to impose upon others, he is almost certain to make an 
unsatisfactory contract, and end in litigation. 

He must be careful not to confine himself to a consideration 
of present conditions. A contract of prolonged duration, which 
is acceptable to-day, may be objectionable next year, but will 
not be in any degree less binding ; dissatisfaction is not a ground 
for cancelling a contract. He should not be content to take the 
opinion of those with whom he is contracting, as to what he de- 
sires, but will independently and carefully consider it from his 


Business Engineering. 



own point of view, and, having once come to a conclusion, will 
not be moved therefrom in essential points. Foresight is that 
quality which differentiates the successful from the unsuccessful 
man, and in making contracts no other quality is so much 
needed. A most frequent difficulty which is the subject of re- 
peated comment by the courts in rendering their decisions, 
springs from the fact that one of the parties failed to give suffi- 
cient thought to the consequences of his agreements, or to an- 
ticipate conditions which a few moments' careful consideration 
would have made plain to him. 

In stating that once having arrived at an opinion one should 
not be moved therefrom, it is not intended to counsel a spirit 
of uncompromising stubbornness, which would probably re- 
sult in a failure to make a contract. Every agreement, when 
finally executed, usually contains concessions from the original 
propositions made by the parties, and one should be ready, after 
having determined what self-interest dictates, to make conces- 
sions at such points as are possible. But this should not be 
done Ughtly or unadvisedly. A concession made in a thought- 
less moment and without due consideration, may mean years of 
litigation and financial loss. In making propositions or de- 
mands, however, it is essential to regard the interest of the 
other party to the contract. Fairness to others is one of the 
secrets of personal success. If, therefore, one approaches the 
making of a contract with an apparent unwillingness to regard 
any but self-interest, and an obvious desire to reap all the ad- 
vantage possible without regard to the equities existing in favor 
of the other parties to the contract, though the negotiations may 
terminate in an agreement of some form, it will lack the surest 
guarantee of successful performance, mutual confidence and 
trust, without which the strongest contract may be turned into a 
bone of contention and the most promising prospects ruined. 

Having definitely determined upon the offer, it must be com- 
municated in any appropriate way, orally or in writing, by letter 
or telegram. In the interest of accuracy, however, the offer 
should, whenever possible, be reduced to writing. 

The offer is a nullity until it is actually brought to the notice 

Lecture Notes. 


of the person to whom it is made, and may be withdrawn at any 
time before it is accepted, notwithstanding a voluntary state- 
ment that it may remain open a definite time. Thus, an offer 
sent by letter may be withdrawn by telegram reaching its desti- 
nation before the letter, or before acceptance. 

4. Unqualified acceptance. 

From the foregoing it is plain that acceptance should be 
prompt, if a contract is desired. Such acceptance must be of the 
exact terms of the offer. A counter proposition is not an ac- 
ceptance and simply leads to further negotiations and a new 
offer. To constitute a contract, it must be possible for the one 
to whom the offer is made to say simply "I accept your offer." 

Like the offer, the acceptance may be communicated in any 
convenient form, but unlike the offer, the acceptance becomes 
binding the instant it passes beyond the control of the accepting 


Thus, the instant an acceptance is placed in the mail, or dis- 
patched by telegraph, it becomes binding and the contract is 
complete possibly some time before the acceptance becomes 
known to the maker of the offer. Thereafter it is impossible 
for either party to withdraw from the contract unless by consent. 
This fact, it will be observed, often embarrasses one who makes 
an offer and wishes to withdraw it. Cautious business men heed 
the advice of Sir Frederick Pollock, who once said: 

'The practical conclusion seems to be that every prudent 
man who makes an offer of any importance by letter, should ex- 
pressly make it conditional on his actual receipt of an acceptance 
within some definite time." 

5. Complete agreement. 

Closely akin to the necessity of an explicit acceptance, is the 
rule that the minds of the parties to a contract must be in com- 
plete accord. This is known as the "Meeting of the minds of the 
parties," and no contract is complete without it. A contract, 
valid in all other respects, may subsequently be avoided or re- 
scinded if it appear that the parties had not arrived at this meet- 
ing of the minds. 

Such a situation arises when to all appearances the parties 

.. «««J*««li»ft««»«'*'5*»******' 


Business Engineering. 

have agreed, but in reality have never come to an understanding. 
The cases when this occurs are generally divided into the fol- 
lowing classes: 

a. Mistakes of fact. 

b. Misrepresentation. 

c. Fraud. 

d. Undue influence. 

0. Mistake of Fact.— It sometimes occurs that all the parties 
to a contract are misled as to the subject matter of their agree- 
ment. Thus, a cargo of grain was sold while in transit by sea 
to London. It subsequently appeared that prior to the sale 
the cargo had been destroyed. It was held that the sale was m- 
valid. Similarly, where a contract was made to dig a thousand 
tons of potters' clay yearly from certain territory, and it subse- 
quently transpired that at the time of making the contract, there 
was not so much as one thousand tons of clay under the land, 
the agreement was declared void. Again, A may agree to sell 
to B a horse (meaning a certain bay). B agrees to purchase the 
horse, supposing it to be another animal. No contract ensues. 
It is, of course, obvious that to avoid the contract, the mistake 
must be in respect to some vital, material point. 

These mutual mistakes are comparatively rare and do not, 
ordinarily, cause great difficulty. Much more intricate are the 
questions involved in the following cases: 

b. Misrepresentation.— It sometimes happens that one party, 
without evil intent, unintentionally misstates facts, or misleads 
the other party. This is known as misrepresentation, and must 
be carefully distinguished from fraud where the deception is m- 


Where the misrepresentations occur in prelimmary negotia- 
tions, they have no effect upon the validity of the contract, unless 
the relations between the contracting parties were such that they 
owed to one another some special duty of exact and explicit 
statements. Such is the case when the parties occupy a confi- 
dential relationship to one another, as that of principal and agent, 
attorney and client, and the like. Such a situation also arises 
where from force of circumstances one party must rely upon 




Lecture Notes. 



the other for his knowledge of the facts. In this case the other is 
bound to the utmost good faith. 

But it sometimes happens that instead of the innocem m s- 
representations being prehminary to the contract, they actually 
become an integral part of it, and the inducing cause for makmg 
it The representation then, amounts practically to a cove- 
nant or warranty, and if false, may be made the basis for a can- 
cellation of the contract. A single instance will suffice: 

A being about to sell a horse to B, without any guarantee, 
says "the horse is sound." B buys and finds a defect; he cannot 
rescind. But if A says "I warrant the horse sound, and a blem- 
ish appears, the transaction is a nullity. 

The practical application of this doctrine to business men is 
that they should show extreme care in making hasty or thought- 
less statements in entering into a contract. I^t all information 
which is given be such as may be substantiated by proof, and let 
no guarantees be made which cannot be performed. 

This leads, naturally, to a consideration of a kindred nature 
The surest way to promote litigation over a contract, and to land 
in an endless maze of trouble and difficulty, is to have a party to a 
contract fail to appreciate the true significance of what he is 
doine We have adverted to the necessity of a complete knowl- 
edge of one's own position. It is equally essential that all parties 
should appreciate their responsibilities. It is a matter of frequent 
occurrence to have a client request his attorney to so phrase cer- 
tain portions of his contract so that he may create an obligation 
upon the other side which will not be suspected at the time the 
contract is made. Nothing is more foolish or short sighted, and 
no wise attorney will accede to such a request. The reasons are 
obvious If the obligation is one which should in fairness be 
assumed, it should be stated openly and frankly. If, on the con- 
trary it is of such a nature that the contract would fail of con- 
summation if it were expressed in the instrument, an unfair ad- 
vantage is about to be taken, and when subsequent to the making 
of the contract its true meaning is disclosed, it will result m one 
of two things. It may be that the agreement will have been in- 
serted in such a skillful manner that it can be enforced, m which 


Business Engineering. 

case the advantages gained therefrom will be at the expense of 
confidence and good will; or, as more frequently happens, the 
contracting parties will be involved in a lawsuit, which may ex- 
tend to the third and fourth generation of their descendants. 

c. Fraud. — Fraud is zuillful misrepresentation or suppression 
of a material fact made by one party with intent to induce an- 
other party to enter into a binding agreement, and which has such 
a result. Fraud is always a complete ground for the rescission 
of a contract, and no agreement can survive its taint. 

Every word in the foregoing definition is essential, and the 
elements of fraud are carefully stated. It must be willful and in- 
tentional; calculated to work injury, and result in it. 

Cases of willful affirmative deception are comparatively sim- 
ple. Usually the only question is as to whether such deception 
relates to a material point. 

A much more difficult problem arises when we consider the 
question of a suppression of material knowledge. What facts is 
one bound to reveal in order to avoid the taint of fraud ? 

On the one side is the danger of fraudulent suppression of 
fact; on the other is the quixotic impulse to disclose all that is 
known, including legitimate special knowledge or business secrets. 
Thus one may buy a house, knowing of impending developments 
which may enhance its value. No obligation exists to disclose 
such knowledge. But if a man sells to another stock, which from 
special knowledge he knows to be worthless, it is as obviously a 


Unquestionably, the line is a fine one between the two cases. 
But consider that in the second instance the seller by accepting 
payment impliedly sold something of value, and the case is prac- 
tically similar to one of willful misrepresentation. Here then 
is the test. When the suppression of facts amounts to a false rep- 
resentation that they do not exist, then the element of fraud is 

But, after all, the best safeguard to business men against 
charges of misrepresentation or fraud is a high standard of busi- 
ness ethics, which makes one willing to forego profits which might 
be gained by sharp practice or doubtful methods. 

Lecture Notes. 





While such distinctions as have been suggested above are 
sometimes difficult to phrase in words, no man, whatever his 
character, finds any trouble in practically determining whether his 
acts are such as conform to the generally accepted standard of 
moral duty. However far, personally, he may have departed from 
a high standard of personal rectitude, and however successful he 
may have become in stilling the voice of his conscience, that arbi- 
ter of duty never dies, and if questioned will, with the same 
certainty with which the magnetic needle points to the north, m- 
dicate conduct which would willingly be submitted for public ap- 
proval, and that which would preferably be concealed from gen- 
eral knowledge. 

Such words are not mere ethical theories, but point the way 
to the most practical test a business man can apply when in doubt 
about the legal aspect of a proposed course of action. Let the 
question be asked: "Would I be entirely willing to have such 
action generally known among my friends and business asso- 
ciates?" If the question can be honestly answered in the affirm- 
ative, no fear need be felt that the proposed course of dealing will 
ever be branded by the law as fraudulent or worthy of condem- 

If the question be answered in the negative, it is certain that, 
while such method of business dealing may in any single instance 
add to pecuniary prosperity, it will in the long run mean loss of 
reputation and the confidence of the business community, as well 
as make extremely likely ultimate censure from the courts. 

If error must be committed, let it be upon the side of over- 
fairness to business associates rather than upon that of unscrupu- 
lous methods. 

d. Undue Influence. 

When an individual is so situated that the will has become 
subservient to another's to a point where independent action is 
practically impossible, such individual is said to be unduly in- 

The most obvious example of such a condition is where one 
who is of feeble mental powers comes so under the power of a 
stronger personality as to yield unquestioning obedience. The 


I' ^ 




Business Engineering. 

dependent person need not be of unsound mind (which would 
make him incapable of contracting) in order to justify the court 
in saying that agreements made by him under such influence, 
lack the essential element of a complete meeting of the minds. 

Such cases most frequently arise in instances of persons of 
advanced age, or in unusually dependent circumstances. 

A contract entered into between such a person and the one 
who is in a position to unduly influence the judgment, by which 
the latter benefits, is always scrutinized minutely, and is more 
than likely to be set aside. 

Sometimes this undue influence arises from the possession of 
a real or apparent authority, sometimes from the necessity or 
distress of the injured party. The result is the same. 

When one who is to be benefited thereby, enters into a con- 
tract with another who is dependent upon him either for advice or 
assistance, it should be insisted that the contract be submitted to 
some disinterested person before execution. In this way will be 
avoided serious complications and charges of bad faith which may 
be as painful as they are untrue. 

Duress, to which reference has been previously made, is some- 
times considered in the light of an obstacle to the complete meet- 
ing of the minds, but the writer prefers to treat it, as has been 
done, as a condition which incapacitates the party affected by it, 
from entering into a valid contract. 

6. Valid Consideration. 

While the law does not concern itself with the details of con- 
tracts made for legal purposes, and will enforce them according 
to their terms, there is one element which is essential to their va- 
lidity. Some return must be given for every promise made or 
right surrendered. This return is the consideration for the con- 
tract. It must be present in every contract in some form or 
another. If absent, the contract cannot be enforced, for it is 
clear that if one promise to do something for another, and re- 
ceive no benefit from so doing, he cannot be forced to fulfill his 
contract. A few examples of the" plainer or simpler character 
will make this clear. 





Lecture Notes. 


1. A man agrees to build a machine for another who agi-ees 
to pay a stated price therefor. The contract is a valid one and 
may be enforced. The consideration for the promise to build 
the machine is the promise to pay the agreed price, and vice 

2. A promises to build a machine for B, but B makes A no 
promise that he will either accept or pay for it. The contract is ab- 
solutely void and unenforceable. There is no consideration for 
A's promise. 

These are simple forms and might, perhaps, have been given 
from general knowledge by any layman. All contracts, how- 
ever, are not simple and it is often difficult, if not impossible, to 
determine whether a valid consideration has been given or not. 
Thus, it is not a valid consideration for one to agree to do what 
he is already under obligation to do. If A, therefore, promises 
to pay B a debt which is already due, it would not serve as a con- 
sideration for B's promise to build a machine, but, on the other 
hand, A might agree with B that if B would build the machine, 
A would, for a definite period, not compete with B in his bus- 
iness in a specified locality. This consideration would be suffi- 

To put it in its simplest form, therefore, if one desires to en- 
force a provision of a contract for his own benefit, he must make 
sure that he has given some value to the person with whom he is 
contracting, in return for the benefit he is to receive from him. 

The first question, therefore, which a business man will ask 
himself when about to make a contract is, what will he give in 
return for that which he expects to receive? He must give 
something. What is given is not altogether material. The law 
will not pass upon the question as to whether adequate value is 
given for what is received further than to say that the relation 
between what is given and what is received must not be so dis- 
proportioned as to be palpably unfair or unjust. Thus, if one 
offers to sell a horse, and the buyer agrees to pay $50 therefor, 
it is a complete consideration, although the horse may really be 
worth $250. If, however, the buyer agrees to pay but $1, and 
the horse was shown to be worth $1,000, it would probably be 


Business Engineering. 

said that there was no consideration. It must be at once ap- 
parent that this is a fruitful subject for discussion in the courts, 
although the usual determination is that the court will not pass 
upon the adequacy of the consideration, so long as a consideration 
existed at all and is not unconscionably small. 

The particular character of the consideration or value which 
is given for what is received, is not important. It may take a 
variety of forms. As has been previously stated, it may be the 
payment of a specified sum of money; it may be the perform- 
ance of work or services ; it may be an agreement to refrain from 
doing certain acts; it may be the suffering of some harm or detri- 
ment; it may be the foregoing of some legal right; but in the 
last analysis, something must have been given up, or the con- 
tract is unenforceable. 

If a complicated contract is being negotiated, it may be that 
the real consideration which will support it is something totally 
different from the conception of the parties. It is the business 
of the attorney to see that this consideration exists, or is made 
to exist, and that it should appear in the contract. Many a 
valuable contract has been lost by reason of a failure to properly 
express the consideration. Let no one be deluded by the fact 
that a contract bears a seal, or that it contains the usual clause 
"in consideration of One Dollar." Both of these safeguards will 
prove broken reeds, if no true consideration exists. 

Formalities Attending the Making of Contracts. 

Mention has previously been made of the necessity of having 
contracts in writing. It was stated that it was not always neces- 
sary to have the written instrument of a very elaborate character. 
A few words in connection with the form of contracts may not 

be amiss. 

Every contract should be signed by all the parties. A seal 
should be affixed for the purpose of raising the presumption that 
a consideration exists for the agreement. Originally, at com- 
mon law, the seal was conclusive evidence of consideration, but 
the development of law has resulted in almost every jurisdiction 
in doing away wholly, or in part, with the distinction between 

Lecture Notes. 


sealed and unsealed instruments. A seal has the added effect of 
prolonging the time within which actions to enforce the contract 
must be brought. Thus, in New York, an action on a contract 
without seal, must be brought within six years, while twenty years 
is given within which to sue upon a sealed instrument. 

Contracts with corporations must always bear the seal of 
the company. It is the legal sign manual of the corporation. 

The form of the seal is immaterial, and in most states a scroll, 
or the word "Seal" written by hand, is sufficient. 

The question is frequently raised, whether it is necessary to 
have the signatures to a contract attested before a notary. If it 
is intended to have the instrument publicly recorded, it is in al- 
most every jurisdiction necessary that it should be acknowledged. 
For instruments which are not to be so recorded, there is no abso- 
lute necessity either for an acknowledgment or for a witness. 
It is, however, desirable in every case to have a witness, if possi- 
ble, and to have the paper acknowledged when it can be con- 
veniently done. This springs from the fact that such a witness 
or acknowledgment facilitates the proof of the instrument. Every 
evidence of care in the signing of a contract adds to the force of 
its contents. In addition to this, the acknowledgment before a 
proper officer fixes absolutely the date upon which the instru- 
ment was in existence and in force. This is often a most im- 
portant point. It is hardly necessary to say that every contract 
should be dated, and should contain in the body of it a clear state- 
ment as to the date when the contract became effective, its dura- 
tion and its termination. All contracts should be executed at 
least in duplicate, and no one should ever allow any contract which 
has been signed to go out of his possession without retaining 
either such duplicate original, or a copy thereof which is abso- 
lutely correct. In these days of carbon copies, it is quite common 
to consider a copy complete which contains only the body of the 
contract. All original dates and signatures should also be copied 
upon the carbon reproduction. 

Having considered the questions preliminary to or connected 
with making a contract, we now pass to the consideration of sub- 
sequent rights and liabilities thereunder. 


Business Engineering. 

Termination by Limitation or Consent. 

It is quite possible that some change of circumstances may 
occur which makes it desirable to terminate a contract, or some 
dispute may arise in respect thereof. Even this brief examination 
of contract law would therefore not be complete unless we gave 
some consideration to the methods of terminating a contract, and 
the cancellation of the rights and liabilities thereunder, either with 
or without the consent of all the parties thereto. 

In practically every contract, executory in form, a date is fixed 
for its expiration. At such time all rights and liabilities under the 
contract cease, unless the agreement be further extended by mu- 
tual consent, or displaced by a new one. It is hardly necessary 
to say that a contract is terminated when fully performed, and 
may also be terminated prior to the time fixed for its expiration, 
by the joint consent of the parties thereto. If, therefore, it be- 
comes apparent after making the contract, that it is mutually unsat- 
isfactory, it may be so abrogated. No trouble will be experienced 
if the parties are in accord. A contract which has been made in 
writing should be cancelled with as much formality as was evi- 
denced in the original agreement, and the parties thereto should 
make certain that they receive proper releases of all liability there- 
under. In the same manner that a contract may be cancelled, it 
may be modified or amended by mutual consent. 

Termination by Legal Means. 

Serious difficulty arises, however, in respect of the alteration 
of agreements or their cancellation when consent cannot be ob- 

Notwithstanding all the precautions which we may take, it 
sometimes occurs that a party to the contract feels that he has 
been misled in entering into a contract ; that he has not been fairly 
treated ; that the contract, as drawn, does not represent the real 
intention of the parties, or that there has been some mutual mis- 
take of fact made by the parties, which renders the contract un- 
profitable. In a still greater number of cases there is a violation 
of the terms of a contract for which redress must be sought. 

Lecture Notes. 


These questions are all interesting and will repay some considera- 

As we have seen in certain cases, a party to a contract may 
rescind the entire contract and be relieved from further liability 
thereunder, even against the will of the other party to the agree- 
ment. The chief examples of this, some of which have been con- 
sidered in connection with the subject of the essentials to a con- 
tract, are as follows : 

1. Where it appears that there is no consideration for the 


2. Where the contract has been induced by fraud. 

3. Where the contract is impossible of performance. 

4. Where there has been a mutual mistake of fact in re- 
gard to the subject matter of the agreement. 

1. We have previously spoken somewhat at length of the ne- 
cessity for a valid consideration in the contract. If it shall be 
found after the contract has been made, that no real considera- 
tion exists, the contract is unenforceable. Many examples of this 
will suggest themselves, for example : A might agree to perform 
some act for B in consideration of the latter's agreement not to 
compete with A in business in a certain locaUty. A might sub- 
sequently discover that B was already under agreement to avoid 
that territory, so that in fact B had given nothing which he 
was not already under obligation to perform. There being no 
consideration for A's agreement with B, he would be entirely jus- 
tified in refusing to perform his part of the contract. 

2. By far the most important ground for abandoning or re- 
scinding a contract is that fraud has been present in its incep- 
tion. If it be found, therefore, after making a contract, that a 
party has been wilfully misled with intent to cause him to enter 
into a contract which he would not otherwise have made, he may 
cancel the entire agreement. It is difficult to prove the fraud 
which must necessarily be present in order to impair a con- 
tract. The essential facts which must be established are as fol- 
lows : It must first be shown that false representations were made 
by the individual with whom the contract was made; that these 
representations were accepted and led to the making of the 




Business Engineering. 

contract; they must have been made about a material fact and 
for the purpose of promoting the agreement. Most important 
of all, the individual making the fraudulent representations must 
be shown to have known that they were false. This latter re- 
quirement is the most difficult to meet. 

One who would rescind a contract upon the ground of fraud 
must return any benefits received under it. He must place the 
other party to the contract in the same position which he occu- 
pied when the contract was made. If, therefore, he has placed 
himself in such a position that he cannot do this, his right to re- 
scind the contract is destroyed. The law will not permit a man 
to receive wholly or in part the benefits of the contract and es- 
cape the liability of performing his duty thereunder. 

3. One may be relieved from a contract which is impossible 
of performance either at the time the contract is made, or by 
the happening of some subsequent event, provided it was not 
known at the time the contract was made that such impossi- 
bility existed. Otherwise, he may be held liable in damages 
for his failure to perform. Where, however, a contract is en- 
tered into innocently, the law will not permit a man to suffer 
by reason of the fact that performance is impossible. Mere dif- 
ficulty of performance, although it may be great, and the loss 
which he suffered heavy, will not excuse performance, nor will 
a temporary impossibility. 

4. Rescission on the ground of mutual mistake of fact has 
been sufficiently considered under a previous subject. 

Upon any of the foregoing grounds, the contract may either 
be said to be void, or may be rescinded. 


It sometimes happens, however, that the maker of a contract 
does not desire to go to the extent of rescission. Perhaps he 
feels that the contract, as drawn, does not accurately express the 
real intent had at the time it was made. In this event the aid of 
the court may be invoked to re-form the contract so that it shall 
accurately present the intent of the parties. This is always a 
more or less difficult task, however, unless the contract is clearly 

Lecture Notes. 


incomplete or insufficient. The general policy of law is that 
a contract in writing cannot be varied by parol evidence. That 
is, one cannot take a contract complete in itself and say that 
something diflferent from what is expressed therein, was in- 
tended. There is only one case in which the court will allow 
this to be done. If the contract is ambiguous or insufficient in 
its phraseology, so that it cannot be determined from the instru- 
ment itself what the real intention of the parties was, the court 
will receive evidence upon this point and will readjust the rights 
and liabiUties under the contract accordingly. The rules of con- 
struction will be considered presently. 

Breach of Contract. 

We now pass to the general question of breaches of contract 
and the results which follow therefrom. A breach of contract oc- 
curs when one of the parties thereto fails to perform a material 
part of the agreement. A failure in an immaterial or insignifi- 
cant portion thereof is not a breach. The breach of a valid 
contract always gives rise to an action for damages sustained 
by such breach and in many cases, if it be apparent that a breach 
of contract is contemplated, the court will interfere and before 
the breach be committed will prevent it by injunction. These 
two forms of reHef must be clearly separated in mind. When 
the damages which follow a breach of contract may be meas- 
ured and determined and the party causing the breach is finan- 
cially able to respond in damages, the only remedy is to sue him 
at law for the amount of the loss which is sustained. If, how- 
ever, such damages cannot be measured nor can any money 
which may be recovered recompense for the loss sustained, or 
where the wrongdoer is financially irresponsible, an injunction 
will lie to prevent the threatened injury. A few examples will 
illustrate this statement. 

If A agrees to employ B at a fixed salary and refuses to do 
so, while B is ready and willing to perform his contract, it is clear 
that the damages which B sustains arise from the loss of his re- 
muneration. Ordinarily, no action can lie against A save to 
recover the amount of the agreed compensation. Let us sup- 


Business Engineering. 


pose, however, that A has agreed not to cut down a large tree 
standing upon his property which gives shade to B's house. It 
is clear that if A does so, the damage cannot be repaired. If 
B sees A about to commit the violation, he may stop it by in- 
junction. Again, A may have agreed with B to permit him to 
use his laboratory for scientific experiments. B cannot obtain the 
same accommodations or facilities elsewhere. His damage will 
be irreparable if A does not fulfill his contract. B may there- 
fore restrain A from removing his laboratory and force him to 
permit the use of it. Again, suppose that A has agreed not 
to practice his profession in the same town with B, and proceeds 
to do so. It is clear that the damage sustained cannot be 
measured in money and the court will grant an injunction to 
prevent the threatened act. Lastly, suppose that A has agreed 
to give B an exclusive license to sell a patented article in a 
certain city, and B finds that A is encroaching upon such terri- 
tory while it appears that A is financially irresponsible. It is 
evident that although it may be possible to determine just how 
much has been lost through sales which A makes, which amount 
could ordinarily be recovered in an action at law, the fact that A 
is financially irresponsible will prevent such relief from being 
efficacious. A may be judgment proof. In this case the law 
will grant an injunction to prevent the unlawful act. 

This power to go beyond the mere question of damages and to 
restrain by injunction, is called the equity power of the court. It is 
very jealousy exercised and may be only invoked where the ordi- 
nary remedies are unavailing. Nor can a man ever invoke the as- 
sistance of a court of equity, unless he is himself free from all 
blame in the premises. There are two maxims of equity which 
may be remembered with profit : "He who seeks equity must do 
equity" and "He who enters a court of equity must come with 
clean hands." Be the complaint never so meritorious or the 
case sound at law, help will be refused unless the complainant 
can show that he is himself free from blame. 

It must be remembered also that whether suit be brought at 
law or in equity the complainant must always show a readiness 
upon his part to perform his obligations under the contract. 

Lecture Notes. 


There are some exceptions to this rule, but they so rarely occur 
and are of such a technical nature that we need not consider 
them. Benefits under a contract can never be claimed unless 
obligations be performed. 

In some cases it may be that performance of a contract is 
prevented by the other party thereto, or that by his act perform- 
ance of the contract has been rendered impossible. In any case 
one must be ready to perform if he would enforce his rights. 

Thus, if one contracts to work for another, and employment 
is refused, the remedy is for the amount of the agreed wages or 
salary. But this amount cannot be recovered, should it appear 
that, upon the refusal to employ, the employee entered the service 
of someone else. In other words, he cannot receive double pay. 
If he recover his agreed wage he must deduct the amount re- 
ceived during the time for what the employer is held liable. 


We now pass to the last of the important considerations in 
regard to contracts, namely, the rules for the construction of 
such instruments. 

The methods by which contracts are construed by the courts 
is a matter so closely within the sole knowledge of practicing law- 
yers that the layman it not qualified to pass an opinion upon it. 
Two or three examples will suffice to explain this. When two 
persons enter into a contract they have in mind not only the terms 
of the particular instrument, but as well, a large fund of knowl- 
edge personal to themselves, which they read into the paper and 
perhaps feel may safely be omitted from its phraseology. Some 
facts they may deem to be so well known, both to themselves and 
to the other parties to the contract, that to express them would be 
surplusage. When, however, the contract is taken before a court 
of justice for interpretation, it may be found that the other par- 
ties to the contract have conveniently forgotten these facts and 
deny their existence, and the point at issue may be deemed by the 
court controlling. This is the situation which occurs in practic- 
ally every contest over a contract. A sharp divergence of opinion 
is found as to what was really meant at the time of execution. 



Business Engineering. 

It is well, therefore, to make certain, before signing a con- 
tract, that its phraseology is so clear, its terms so explicit and its 
contents so full that it may be submitted to any court, before 
which it may be brought, containing in the body of the instru- 
ment itself, all the facts which are necessary to support the de- 
sired view of it. 

It must also be remembered that many expressions common- 
ly used in contracts have a widely different significance in a court 
of law from their popular meaning. Furthermore, it is frequently 
the experience of litigants that they find obligations imposed upon 
them by the terms of their contracts, and which are implied from 
provisions stated therein, which were never in contemplation at 
the time the instrument was made. It is a lawyer's business to 
pass upon all these points. If an attorney be wise, he will neither 
draw nor pass upon a contract until he has first satisfied himself 
of the surrounding circumstances, and in many cases of the details 
of his client's business, in order that he may judge whether suffi- 
cient is expressed in the contract to guarantee its enforcement in 
a court of justice. Points which may seem insignificant to the 
client may seem important to him, and so prove if the contract 
be under fire. No one, therefore, should lose patience with an 
attorney if he seem to ask questions which the client may deem 
irrelevant and superfluous. It is a sign that he is in good hands. 
It is much better that the attorney should know too much than 
too little. No attorney should ever be employed who cannot be 
trusted with the minutest details of a profession or work. 

Many disputes arise from the fact that the parties to a contract 
are mistaken in their ideas of their obligations thereunder. With- 
out advice they assume to act in a manner which they deem justi- 
fied by their contracts, and which in fact is in violation thereof. 
At times a failure to comprehend the true meaning of a contract 
may be excused upon the ground of the inherent difficulty of the 
case. More often, however, a few moments' careful consideration 
of the contract, prior to action, and even a slight knowledge of the 
rules by which such instruments are construed, would have pre- 
vented the violation. If, therefore, after making the contract the 
question arises whether a certain proposed course of action will 

Lecture Notes. 


be in accordance with the contract or in violation of its terms, the 
instrument must be considered, not in the light of personal wishes 
or even of individual opinion. If a dispute arises between the 
parties to the contract it will not be settled by any such authority 
as this. The court will adjust the differences between the parties 
and construe the contract in accordance with well established 
rules. An attempt must be made to regard the contract as the 
court will regard it. It is desired to give a few practical sugges- 
tions upon this subject. 

In the first place, when a contract comes before the court for 
interpretation, examination will be first made of the instrument 
itself, for so far as the agreement is clear and unambiguous the 
court will give to it full force and effect, nor will it allow any 
explanation to vary or alter the explicit statements made therein. 
This is obviously upon the theory that the parties were presumed 
to know what they did at the time they entered into the agree- 
ment, and when their intention is clearly indicated it must pre- 
vail however burdensome or disagreeable. Thus far the inter- 
pretation is comparatively free from difficulty. It frequently 
happens, however, that while the question in dispute is partially 
covered by the terms of the contract, the phraseology of the in- 
strument is susceptible of two or more interpretations. It is then 
the province of the court to determine what was really meant by 
the language employed. There are a number of broad rules to 
guide the court. 

1. The words will be given their ordinary and commonly 
accepted meaning, unless it appear from the circumstances of the 
case that they were used in a special sense. 

2. Where the subject matter of the contract concerns a par- 
ticular trade or business, words having reference thereto will be 
given the meaning usually ascribed to them in such business or 


3. The court will take cognizance of particular uses or cus- 
toms aflFecting the subject matter of the contract. 

4. The court will endeavor to ascertain from any possible 
source what the real intent of the parties was, and give force and 
effect to that intention. 


Business Engineering. 

This last rule is the most important of the four, and com- 
prises in a measure the other three. If the court can once deter- 
mine what the parties really meant it will conform the contract 
thereto, no matter what the actual phraseology may be. The first 
three are in reality aids to arriving at the last. 

It frequently happens that the subject in dispute is omitted 
entirely from the contract, and the court is then remitted to the 
necessity of determining what is fair and equitable, having in 
mind the whole contract and the circumstances surrounding it. 
In other words the court will say that if the question had come 
up at the time of making the contract, it would have been disposed 
of by the parties in general conformity with the rest of the agree- 

It is hardly necessary to say that it must appear that the mat- 
ters omitted from the contract should have been included therein 
in order to justify the court in interfering. By that is meant that 
it must be so inseparably connected with the contract and so 
bound up in it that it may justly be claimed that it is implied in 
the instrument itself. Mention has been previously made of the 
fact that it frequently happens, in making a contract unadvisedly, 
that the parties find obligations imposed upon them by implication 
which they did not consider at the time the agreement was made. 
In passing upon such points as this the court applies much the 
same rules as in cases of ambiguity. In the last analysis they are 
determined by the intent of the parties and the principles of fair- 
ness and equity. If, therefore, a doubt arise as to obligations or 
rights under a contract, and the point in question is not found to 
be clearly stated in the instrument, the best test which can be 
applied, in order to determine action thereunder, will be to at- 
tempt to take the position and viewpoint of the other party to 
the contract. It should be considered whether from his stand- 
point the course of action which is proposed would be fair and 
equitable, and in accordance with the general intent, as disclosed 
from the whole contract. Let the question be asked whether, 
if the positions were reversed, such action would be permitted. 
If this be done honestly, both sides of the question will be argued 
with equal vigor, and an attempt will be made to arrive at a deci- 

Lecture Notes. 


sion which is in accordance with what is fair and just. If the 
contract be called before a court of law and an attempt made to 
justify a given action, the course pursued will be determined by 
these principles, and their dictates might as well be observed be- 
fore as after. Incidentally much trouble will be saved. 

It is a difficult thing to take an unprejudiced view of facts 
in the face of personal interests, but the attempt to do so should 
be made, if not from higher motives, because it is certain that in 
the long run it is more profitable to do so. Above all, one should 
not be carried away with the idea that because a contract may 
seem without flaw or defect it will prove sufficiently strong to 
justify an act v.hich is not in accordance with these principles 
or which will make it possible to obtain an undue advantage over 
an associate. 


Such are the salient principles of the law of contracts. There 
remain only one or two observations, which are in the nature of 
general advice. 

Above all avoid, if it be a possible thing, litigation over con- 
tracts. It is better to surrender at times very substantial advan- 
tages rather than to undergo the dangers and difficulties of a law- 
suit. Though one may win eventually, it too often occurs that, 
despite the best efforts of the most competent attorneys, the ulti- 
mate victory will be fruitless. Litigants are involved in heavy 
expense and tedious delay. Their business may, meantime, be at 
a standstill, and they may, while in pursuit of fancied gain, lose 
very substantial present advantages. Like every other business 
question, when one is faced with Htigation he must weigh whether 
the advantages which he will gain outweigh the certain disadvan- 
tages which he incurs. 

Unfortunately, there are too many cases where litigation can- 
not be avoided in justice to one's own rights, and with proper 
regard for one's own interests. The number should not be in- 
creased unnecessarily. He who is forced, however, into litigation, 
should make up his mind to pursue it until he has either obtained 


Business Engineering. 

his rights or a final decision of the highest court is rendered 
against him. 

The writer has endeavored in presenting this subject to give 
only general principles, and to avoid embarrassment by technical 
details or a discussion of the more complicated points. In some 
instances principles which have been explained are subject to 
minor exceptions. As it is especially desired to make these notes 
of practical benefit, it will be found that at times the writer has 
not been content to simply state the law, but has made sugges- 
tions as to its application in everyday affairs. Technical accuracy 
has not been sought so much as a simple exposition of general 
principles, which at best are sometimes puzzling to the lay mind. 

The most satisfactory result which could follow the pub- 
lication of the foregoing pages would be to provoke the com- 
ment that they set forth nothing more than principles of ordinary 
right conduct and common sense. Of these the law should, and 
aims to be, the exponent. 

It is obvious that the principles of the law, however well 
fixed, must be applied to such a wide variety of cases that they 
appear to assume different forms. It sometimes seems to the 
layman that distinctions made by courts and lawyers are more 
fancied than real, and at times the application of legal principles 
seems in individual cases to work hardship. It is only a super- 
ficial observer who joins the ranks of those who would complain 
of the technicalities of law or the difficulties and delays in its ad- 
ministration. The science of law is founded upon theories and 
teachings which are above and beyond any individual case. In 
the last analysis, the law is based upon ideas of fairness and justice 
which have been in process of development from the time when 
the Mosaic law was declared. If one could be absolutely certain 
that he could determine in any given case that which was abso- 
lutely fair, honest, straightforward and equitable, and in accord- 
ance with the greatest public good, he could be perfectly sure 
that ultimately his view and actions based thereon would be sus- 
tained by the courts of last resort. 

The greatest lawyers have been those whose first thought in 
any case brought before them was always, "What ought the law 

Lecture Notes. 


to be?" It is said that Daniel Webster before he would accept a 
retainer always considered, not whether he could successfully 
urge the contention of his clients but whether such contention 
ought to be sustained. If he could answer this question in the 
affirmative, he accepted the case ; if not, he refused it. Almost all 
litigation in the last analysis arises out of an attempt by one or 
more of the parties concerned to act in defiance of the abstract 
principles of justice referred to. If, therefore, a man desires to 
be successful in his relations with those about him, which is only 
a broader definition of contracts, he should be certain that he so 
rules himself that he not only serves his own interests but that 
he respects the rights of those about him. It is a mistaken im- 
pression prevalent in the minds of many that the only duties which 
are owed to our neighbors are those which are enjoined by printed 


Before the statutes were ever conceived the principles which 
they set forth were found in the moral law, which contained and 
contains not only those matters which have become the subject of 
legislative enactment, but also those ideals of duty and upright- 
ness which cannot be set forth by written words, and which speak 
most loudly and with a most conclusive force in the individual 
conscience. To think that these latter may be ignored with im- 
punity is a false idea. Sooner or later in the aflFairs of business, 
men will be called upon to square their actions with these precepts. 
If they are unable to do so the chance of ultimate success is small ; 
but conscious that he has acted in accordance with their teach- 
ing a man need not fear to submit the contracts and agreements 
of daily life to the judgment of any tribunal. 



October, 1904. 

In each of my classes, I have found that certain of the men 
had already received some instruction, more or less complete, in 
bookkeeping. I am always glad to find that there are some of 
our students who have been thus benefited; but let me say to 
them that they can still well afford to give close attention to 
these lectures. They can get more from them than can those 
who have previously had no instruction in this line; for they are 
better prepared to digest the matters placed before them and 
they should be more keen in their appreciation of the value of 
such instruction. Their minds have been prepared for this line 
of instruction, and this is a point, the importance of which will 
be appreciated more and more as knowledge is gained in the 
school of experience. The value to the individual of advanced 
instruction depends upon how completely the mind has been 
prepared therefor by previous elementary instruction and ex- 

But apart from all of this, you will find that I am covering 
in these lectures much that is outside of bookkeeping, and much 
which the bookkeeper and even the accountant would not be 
competent, through lack of special training, to give you. As a 
warning, I may say that in my previous classes I have found 
that sometimes the men who had received instruction in book- 
keeping before coming to the Institute made a poorer showing 
in the examinations than those who had not had this previous 
advantage. Probably this was because they thought that they 
were so fully informed that it was not necessary for them to 
make any effort to follow the subject with me. Perhaps it is 
already apparent to many of you that much that is of value in 
my lectures comes out incidentally through the informal state- 
ments of my own experiences by way of illustration. 

What you are looking for, we can assume, is real success in 
your chosen profession. Then certainly it will be of assistance 

Lecture Notes. 


to you if you can draw upon the experiences of one who proba- 
bly has had to meet nearly all the difficulties that you have had 
and will have to meet, and perhaps some in addition, and is 
anxious to give you as far as possible the opportunity to avoid 
his errors. 

You should be interested to know what an employer is look- 
ing for in the employe. I can give you, in advance of your 
graduation, information in this direction; and I can give it to 
you because I was, for many years, a salaried employe and for 
many more years a salaried employe while also a large employer 
of engineer-assistants, and still later, an independent employer 
of technical graduates. While, of course, employers are gov- 
erned by varying ideas in making their selections, I can state to 
you what I have been in the habit of looking for; and I am 
inclined to think that today, in connection with the keen com- 
petition which is now a feature in nearly all lines of industrial 
work in this country, many employers are guided by the same 

I would select, first, for honesty, then for thoroughness 
and then for energy and earnestness. First of all, I do not want 
any man in my employ unless he is honest in his intention to 
work wholly in my interests. Secondly, I do not want him 
unless he will do the work assigned to him thoroughly, even if 
the quantity of work is not large. Lastly, if I can get a man 
who is honest and thorough, and also is endowed with energy 
and earnestness, in other words, has a large capacity for work, 
I know then that I have a man who will meet all reasonable 
requirements. Many young fellows, and Stevens Institute men 
amo^g the number, soon give up the employment which they 
first secure after graduation because, as they have often ex- 
pressed it to me, they saw no chance ahead; whereas the facts 
are that they have not yet secured a thorough command of the 
minor details to which they had been assigned. The young 
graduate should be very slow to turn away from work to which 
he is assigned because he sees no advantage to himself in doing 
that work thoroughly. To him, the work seems unimportant, 
but on this point he is not yet competent to judge. It may be 



Business Engineering. 


that his employer is primarily or incidentally testing him as to 
thoroughness; is testing him with what appears to be work of 
little responsibility. The man who performs any duty, no mat- 
ter how humble, anything less than thoroughly has no right to 
expect promotion. The employer who would promote such an 
employe does not deserve loyal service. 

1 told last year's class of a case which, at that time, had just 
been called to my attention. Three young graduates were em- 
ployed by a certain industrial concern and put to work at all sorts 
of rough detail work. They were well paid. One man resigned 
in a month or two because he said it was not work suited to the 
capacity of a man who had received a technical education ; the 
second man stuck to it for a year or so, grumbling much of the 
time; the third man went ahead uncomplainingly, performing 
thoroughly and promptly every task to which he was assigned. 
This third man was transferred from one rough job to another for 
three years. Then the manager sent for him, reminded him that 
his two companions had left, one after a very few months, the 
other after twelve months. He then asked this third man what 
had led him to go on with the work assigned to him. The young 
man replied something to the eflfect that he was perfectly satisfied 
with the fact that he was day by day gaining experience, day by 
day he found there was something to learn, and that he was confi- 
dent from what he saw of the management that there would be a 
place for him, if he could prove that he was competent to fill some 
one of the more important positions. The manager then told him 
that his services were satisfactory, that he would now be pushed 
forward to higher positions, and at the end of two more years he 
would be placed in a position of authority and responsibility if he 
continued as he had begun. The result was at the end of five 
years this young man was drawing a salary of $5,000 a year, this 
salary being warranted by the fact that he was competent and in 
sympathy with the Company's scheme of management. 

There are some who are perfectly willing to do the work as- 
signed to them and do it thoroughly, but who do not go beyond 
this and seek for opportunities to take on additional work or to 
further cultivate their powers in the school of experience. These 

Lecture Notes. 



men, lacking in ambition, initiative, or in robustness of mind or 
body or both, will probably continue to fill minor positions. But 
their lives are successful as compared with the lives of those who 
have the desire and push to go higher but are not willing to 
perform the necessary preliminary drudgery. 

I am continually brought in contact with men who attempt to 
justify their incapacity by claiming that they are men of breadth; 
that they employ narrow men to do their detail work. The facts, 
probably, are that they have no real capacity except to steal the 
product of other men's brains. 

Do not misunderstand me. I am not advising you to be 
narrow men as opposed to broad men. Add breadth to your 
make up as far and as fast as you can. The men who do each 
piece of work thoroughly and then try to learn how to do some- 
thing else just as thoroughly mill gain in breadth. The narrow 
man is the man who is satisfied with the thorough performance 
of one narrow line of work. 

There are many men of breadth who do employ men to do 
special work for them, work which perhaps their employers 
could not do as well for themselves ; but, almost without excep- 
tion, these men are masters of detail in some lines and so govern 
themselves by an appreciation of the necessity for accuracy and 
completeness of detail in all lines. 

I have more than once had Napoleon quoted to me as the 
personification of breadth ; I then quote him back as the master 
of detail, not only of one department in army management, but of 
every department. He knew what could be accomplished and the 
best means to adopt therefor. 

The fact that there are superficial men who flatter themselves 
that they are broad, and who succeed in making money through 
reckless push, should not encourage us to believe that it is not 
desirable for a conscientious man to pass through the drudgery of 
the training period. For one of the former type who succeeds 
there are hundreds who can be found sliding more and more 
rapidly down hill, perhaps starting from watching the ''ticker" in 
a broker's office and winding up as the shabby-genteel tramp or 





C2 Business Engineering. 

The privates in the army of promoters are largely of this 
class and many of those who succeed as money makers do so be- 
cause they are willing to risk the money of their friends and 
dupes. With them it is a case of "Tails I win, heads you lose. 

Believe me when I say that employers find it quite as difficult 
to secure competent employes as men out of positions find it 
difficult to secure satisfactory employment. Intelligent employers 
are constantly on the watch for their young employes to betray 
their inner selves. The youngster may be doing some very sim- 
ple work, but if the intelligent employer sees that the work is 
being done thoroughly and with energy, the chances are that a 
mental note will be made that that fellow is capable of doing 

something larger. ^ 

Young men who want to secure remunerative employment 
must be willing to go where that employment calls them. Those 
who insist upon being located in the vicinity of New York— for 
instance— must be willing to recognize that their chances are ac- 
cordingly reduced. 

One of the great troubles with young men— and older men 
toc^is that they do not complete their work. When they meet 
with a problem which they cannot at once see how to solve they 
fall back on the man above to make good their deficiency, not 
recognizing that it is their duty to go ahead and do the best they 
can and go as far as they can without assistance. Let me quote 
from Mr. Kerr's admirable address to the last graduating class : 
"This is about the time to show your nerve. Don't be dazed or 
baffled, but make a start. Use your wits and you will get some- 
where, and if you cannot always see the end it will constantly get 
nearer and plainer when you go as far as you can and then see 

how far you can go.'* ^ 

A friend of mine last summer had an experience in this 
direction. He was engaged in a most important piece of work. 
His strength was greatly reduced by ill health and he was 
anxious to tax his strength as little as possible, and therefore 
to do little more than direct the work of others. But he found 
that his chief difficulty was to get any one employe to finish 
up any one piece of assigned work. After working four or five 

Lecture Notes. 


months on this case, he told me that there was only one man of 
the whole lot who had completed any one piece of work assigned 
to him, and the result was that his health was again broken down 
by the work entailed in making good the deficiencies of those 
who were paid to do the work; and these men were specialists 
in the lines for which they were employed. In such surround- 
ings see how the thorough man shines out. 

Let me give you an example from my own experience. It 
has to do with a day laborer, but the principle is exactly the 
same. Years ago I had undertaken to push through a piece of 
outside work which had to be completed within a given time 
or the result would be a considerable loss to my company. My 
directors were reluctant to have me undertake the work, feeling 
certain that it could not be completed within the time limit. I 
took on a large force and organized it in squads for diflferent 
classes of work. One part of the work, and a very important 
one, was to fill in the excavations as fast as the work under the 
surface had been completed. After a day or two, I noticed that 
a young Scotchman only recently landed and quite green at 
the work, was the only one who could be relied on absolutely to 
follow my instructions in this class of work. The work to be 
done was easy to understand; the trouble was that there was 
so much drudgery connected with it that the majority of the 
men would neglect it unless constantly supervised. I soon found 
that this man's work was not neglected, whether I was looking 
on or whether I was in some other part of the field. After a few 
days, I took him to one side, told him I was satisfied with his 
work and asked him if I could rely on him to boss a small gang, 
if I placed that department of the work in his hands; that I 
would back him up, but would he be willing to tell me of the 
facts if the men neglected their work and if his authority was 
disputed. He expressed confidence in his ability to satisfy me, 
and I placed him in charge as a sub-foreman. The result was 
that that part of the work was done thoroughly and never gave 
after-trouble. The outcome was that this man, instead of being 
laid off as the other laborers were at the end of this particular 
job, was taken into the works and given steady employment at 



Business Engineering. 

an increase in wages of 33 per cent. He was then given an 
opportunity to learn the details inside the works and secured 
employment for life at good wages. 

I quite appreciate that my arguments in favor of thorough- 
ness do not appeal to the highest motives. But there is nothing 
wrong in a man trying to advance his interests and it is his duty 
to make himself so competent that he will never be a charge 
on his friends or society. A duty well performed from lower 
motives frequently leads to the development of higher motives. 

Recently I have had drawn to my attention a number of 
times the fact that young engineer-students do not really appre- 
ciate what their technical education is doing for them. For 
instance, in a recent interview with a man who graduated last 
year, I was informed that he had learned more in three months, 
running a small plant and being made responsible for the care 
of the plant, than he had learned during the four years at Stevens 
Institute. This is a sample of many cases of a like nature which 
I have had forced upon my attention. This young man failed 
to see that it was largely because of his training at Stevens Insti- 
tute that he was able to so quickly learn to run this plant. It 
was his training at "Stevens" which had qualified him to make 
this rapid progress in the school of experience. Without this 
preliminary training, he might never have been able to learn 
what he had thus learned in three months. 

This lack of appreciation for the part which the college train- 
ing plays in a man's after life, and especially, his success, is not, 
by'^any means, confined to the technical graduate. We frequently 
hear men say that they are unable to put their fingers definitely 
upon anything for which they can thank their college training. 
No doubt this is true, in a measure, with many men who neglect 
their opportunities : but the man who is so inclined to question 
the value of a college training should bear in mind that it is not 
the facts stored up which are of so much value, but it is the 
cultivated capacity for straight thinking and reasoning. The 
technical graduate especially should have this point in mind when 
he is inclined, in his pessimistic moods, to feel that he has wasted 

Lecture Notes, 


four years devoted to technical study. Even the man who takes 
up employment in a branch of engineering which has not been 
specifically covered by his college course will find upon considera- 
tion, if he has any powers of analysis, that it is the preliminary 
and fundamental training in science and mathematics which has 
qualified him to take up, with confidence as to his ultimate suc- 
cess, his particular specialty. And this brings me to another point 
which is frequently urged against the value of a college training, 
and very often urged against the value of a technical training. 

You hear it said that men of high scholarship do not often 
succeed in life. It is true that men who have gone high in 
scholarship frequently are not successful in practice. If so, this is 
because they have failed to learn in the school of experience ; for, 
as I have said, you must bear in mind that the work in the school 
of engineering must be supplemented by equally conscientious 
work in the school of experience. To graduate at ** Stevens," a 
man must pass 60 per cent, in every study. If our 60 per cent, 
men succeed in after life, as compared with those of a higher 
grade of scholarship, it is that by reason of their personal char- 
acteristics or their environment they take better advantage of the 
opportunities afforded in the school of experience, and so they 
secure in that school such a high per cent, that, averaged with 
their low grade of 60 per cent, in the technical school, their gen- 
eral average is still high. Whereas, if the technical graduate who 
has secured a 90 per cent, average in the school of technology neg- 
lects, through one cause or another, to pursue his studies in the 
school of experience, fails even to get a passing-mark in the school 
of experience, his general average will still be low as compared 
with that of the man who secured a 60 per cent, grade in the 
college and a 90 per cent, grade in the school of experience. This 
does not apply in the same degree to the men who graduate from 
an institution like Oxford and then continue to work in some of 
the fields of higher scholarship, if they work at all. Naturally, 
then, the high grade obtained in the college follows them through 
their work in life. 

As I am constantly trying to show you men, the technical 
education that you get in a school of technology must be supple- 


Business Engineering. 

mented by the training that you will receive in the school of expe- 
rience. The industrial manager of today must be a man who 
has had the opportunity in both schools and has taken full ad- 
vantage of all his opportunities. In this connection, let me refer 
to a point which I have had forced on my attention a number of 
times since I have been president of the Institute. As you know, 
we are in the habit of calling in engineers from outside to lecture 
to our upper classes on some special features in engineering prac- 
tice. We frequently call in some of our own graduates. I have lis- 
tened to a number of these lectures given by men who are essen- 
tially engineers ; that is, they are responsible more particularly for 
the strictly engineering side of their business than for the com- 
mercial side. Still I have noticed and drawn to their attention, 
and received their acknowledgment of the truth of my observa- 
tions, that one-half to two-thirds of each lecture is devoted to 
the practical features of their work, and especially to the ques- 
tions of commercial limitations under which they have been called 
upon to operate. 

Therefore, to give your technical studies their full value after 
graduation, you must be prepared to quickly acquire in the school 
of experience the ability to practically and efficiently apply your 
theoretical knowledge, but you must also quickly learn in that 
school what the business world requires you to know and do. 

It is to prepare you for this part of your work in the school 
of experience that I am taking up with you the work of my special 


October, 1904. 

In the reprints of lectures and magazine articles which you 
have been required to read you have been furnished with suf- 
ficient reason for my claim that the engineer should be pre- 
pared to practice his profession within the limits set by com- 
mercial conditions, and that also the engineer should be familiar 
with business methods and practice. Especially, he should know 
the language of business ; namely, the language of the accountant. 
Without this knowledge of the language of the accountant, the 
engineer is unable to read the statements that give the final 
result of the enterprises in which he is engaged except through 
the employment of an interpreter; or, in other words, he must 
take on faith any and every statement which his and other men's 
bookkeepers and accountants make to him. For instance, re- 
ferring to Mr. Turnbull's lecture, at the bottom of page 25 of the 
Reprints he says: 

"We will suppose that we are doing a simple merchandise 
business, buying and selling. We shall have charged all our 
purchases to Merchandise Account, and we shall have credited all 
our sales to Merchandise Account. We will assume that our 
purchases have amounted to $100,000, and our sales to $90,000, 
but we find upon taking an inventory that we have goods on 
hand worth $25,000. Now, if we add the $25,000 to the $90,000 
at credit of Merchandise Account, we have $115,000 as against a 
cost of $100,000. It is evident to you, therefore, that we must 
have made $15,000 profit. But to arrive at that in bookkeeping 
fashion, we debit Merchandise Account with $15,000 profit, and 
credit Profit and Loss Account, bringing down a balance to the 
new Merchandise Account of $25,000, being the $10,000 balance 
already at the debit plus the $15,000 profit charged, making $25,- 
000 as the value of merchandise and the debit to Merchandise 
Account with which to commence the new fiscal period. Now 
we find that we have $15,000 to the credit of Profit and Loss, 


Business Engineering. 

but we have various expense and other debit accounts affect- 
ing the result of the business, and we debit Profit and Loss and 
credit these various accounts with their respective amounts; (we 
may have also credit balances to other accounts, such as Inter- 
est affecting the result, and these we credit to Profit and Loss), 

and assuming that as a net result of these various debits and 
credits to Profit and Loss we have a balance of $10,000, this 
then is the net gain for the year, and we transfer it to our in- 
dividual account by debiting Profit and Loss and crediting our 


I have found with this class and the two previous classes 
that this statement as written could not be followed by a majority 
of the students. I am certainly warranted in believing that the 
members of our senior classes (having been subjected to the 
'Veeding-out" process for three years) are above the average 
in intelligence and ability to follow out a more or less abstruse 
proposition, but still the proposition here made by Mr. Turn- 
bull is an extremely simple one. The trouble, then, is unques- 
tionably in the fact that the students do not understand the 
language in which the statement is made. Part of Mr. Turn- 
bull's statement is made in the language of every-day life and 
part in the language of the accountant. 

Now, let me make this same statement, employing only the 
language of every-day life, and there is not a member of the 
class who cannot follow me. 

Jones engages in a simple merchandise business, buying 
and selling. He purchases merchandise which costs him $100,- 
000. Three-quarters of that merchandise, or what has cost 
him $75,000, he sells during the year for $90,000. The expenses 
for operating the business for the year amount to $5,000. He 
has, therefore, made a gross profit on his sales of $15,000, and 
it has cost him $5,000 to carry on the business in connection 
with those sales, leaving him a net profit of $10,000. 

The statement as thus made a school-boy can follow. But 
here it is to be borne in mind that in business we must have 
a method of recording our results which is concise and based 
upon principles capable of universal application. If the en- 

Lecture Notes. 


gineer — and especially the engineer who engages in industrial 
management — expects to be able to read the statements of busi- 
ness results without depending upon outside interpretation, he 
must, then, as I have said, be able to read with some facility in 
the language of the accountant. In the example from Mr. Turn- 
bull's lecture that I have given (and it is an extremely simple 
example and selected by him for that reason) we have proved 
that the statement could not be followed by a majority of the 
members of our senior classes without additional explanation or 
interpretation. But it is to be borne in mind that that statement 
is made only in part in the language of the accountant. We may 
assume then that if it had been made entirely in the language of 
the accountant it would have been absolutely unintelligible to 
those members of the class who had not already had experience in 

I think, then, that this presentation of the subject, in con- 
nection with the facts and arguments which have been brought 
before you in the ''Reprints," should convince you that a knowl- 
edge of accounting is not only important but absolutely necessary 
to the engineer who aims to satisfactorily fill any managerial 
position. Now, I do not expect to be able to make bookkeepers of 
our students. This is not necessary, nor is it even desirable. I 
only aim to give you such a knowledge of the principles of double- 
entry bookkeeping that you will be able to read without assistance 
the statements of results, for it must be borne in mind that unless, 
by detailed analysis of the statements of account, you are able to 
detect inefficient and uneconomical items in the management you 
are certainly unable to introduce corrections thereof. A compe- 
tent analysis of accounts is at the very foundation of competent 
and economical management. 

The bookkeeper is the man who is trained to do the actual 
work of bookkeeping correctly neatly and rapidly. He may be 
an admirable bookkeeper, but a very poor accountant. That is, he 
may be able, with accuracy and rapidity to follow the lines laid 
out for him by the accountant, but he may not have such an 
understanding of the principles and the details of the business 
as will enable him to lay out for himself the system of accounts. 



Business Engineering. 

Now, it is quite possible for the members of this class to 
obtain such a knowledge of the principles of accounts that they can 
direct such an expert bookkeeper as to the proper methods to be 
followed without having that expert bookkeeper's facility in the 
actual performance of the work. 

I have been, more than once, told by young men who have 
taken courses in bookkeeping in the commercial colleges that they 
regarded it as time wasted, because the bookkeeping methods 
followed in different establishments so varied that very likely after 
having learned in the commercial college they would be required 
to take a position where these methods had no place. If this is a 
fair statement of what is done in some of the commercial colleges, 
it simply goes to show that those colleges teach methods and not 
principles. I am reluctant to believe that this is true. It is true 
that the methods followed in different establishments vary to a 
great extent. The methods followed generally in America are dif- 
ferent from those followed on the Continent of Europe. But the 
same general principles are included in all systems of double-entry 
bookkeeping, and if our students get a firm hold on those princi- 
ples they can, with some little effort, analyze the statements pre- 
pared from any well-kept set of double-entry books. It may be 
necessary to have the details of accounts, and the like, explained, 
but such explanations can generally be obtained when necessary. 

Now, I have referred to the double-entry system, or the Italian 
system, as it is sometimes called. Mr. Turnbull in his lecture has 
shown that there are two systems, the single-entry and the double- 
entry systems. The single-entry system does not especially inter- 
est us, because it is only employed by retail concerns; or, per- 
haps, to be more accurate, it should be employed only in such 
cases. As will appear later on, the single-entry system does not 
afford any check as to the correctness of the transactions recorded, 
whereas the double-entry system does afford as complete a check 
as can be devised. 

There is often some misunderstanding as to the meaning of 
double-entry in this connection. Let me say at once that it does 
not mean that for every entry made by the single-entry system, 
bv the double-entry system there are two separate entries. It does 

Lecture Notes. 


mean, however, that in every transaction the amounts involved 
appear upon both sides of the books, namely the debit side and 

the credit side. 

To understand this a little better, let us go back. Every time 
that Jones made a purchase of merchandise in accumulating his 
$100,000 worth of merchandise stock, the man from whom he 
purchased made a sale, and every time that Jones made a sale of 
part of that merchandise, the man to whom he sold it made a pur- 
chase ; that is, for every sale there is a purchase and for every 
purchase there is a sale. Or, for every credit there is a debit and 
for every debit there is a credit. And this is true even though 
each of these credits and each of these debits do not appear sepa- 
rately on the books of account. As you will later see, by the time 
the transactions are finally recorded on the Ledger, many credits 
and many debits may have been consolidated ; but the fact remains 
that each side of each transaction will in time find its place in the 
final record. You know the old saying is that it takes two to 

make a bargain. 

Then, in the double-entry system, in every transaction, in 

one way or another, both the credit and the debit sides of the 

transaction are recorded on the books. If Jones buys from 

Robinson $100 worth of merchandise, Robinson sells to Jones 

$100 worth of merchandise, and if both sides of the transaction 

are recorded, $100 appears on each side of the final book of 

record, namely the Ledger, and these two amounts balance each 

other; and this is true with all other transactions. Hence in 

this final book of record, if the books have been correctly kept 

and we draw off a statement showing the balance against each 

account we will find that the balances from the debit side sum 

up to the same amount as the balances from the credit side; or, 

if, as many bookkeepers do, instead of taking the balances we 

take the sum of the items on one side and the sum of the items 

on the other side, we shall again find that the sum of the debit 

items equals the sum of the credit items. If such a balance is 

not obtained, namely if there is a difference between the sum 

of the debit balances and the sum of the credit balances or 

• between the sum of the debit items and the sum of the credit 



Business Engineering. 

Lecture Notes. 


items, we know that some mistake has crept into our work. 

While it is true that in spite of the check obtained through 
this system and in spite of the care that may be taken, errors 
will creep in because two errors of a like amount may be 
made which will balance each other, or an amount which should 
be posted to one account may be posted to the correct side of 
another account, still, this does not disqualify the double-entry 
system, for after years and years of experience it has been found 
to afford as complete a system of checks as it has been so far 
possible to discover. 

I have spoken of the final record as the Ledger. It might 
perhaps seem more in order if we first took up the primary records 
and then went on to the final record, but the result we are looking 
for is to be found in the Ledger. Therefore, I will first consider 
that and then work back from the result to the means employed to 
obtain the result. 

If the members of this class who are interested in the 
Athletic Association had occasion to distribute against the sev- 
eral athletic teams certain items of expense they might perhaps 
take a sheet of paper and put down headings to designate the 
several teams. As each item was analyzed they might determine 
what per cent, thereof was to be charged against each team. 
Having determined the per cent., they would figure out and put 
under the proper heading the amount so determined. They 
would do this for each item to be distributed. Having finished 
this work of distribution or classification, they would foot up 
the amounts in each column and then, to check up as to the 
correctness of their work, they would see if the sum total of 
these several amounts as distributed in these several columns 
equaled the total of the column of items before distribution. 
In a simple case of this kind probably all the purposes would 
be served by such a method carried out on a loose sheet of paper, 
though it would be then preferable to make some final record 
in case some question might arise in the future. But in a 
business of any size, the amounts of money which are spent 
and the amounts of money which are received and all transac- 
tions in which no money actually passes, have to be recorded in 

permanent form and by such a system that the facts can be 
shown at a moment's notice. If a man is owing us money and 
from time to time he is making payments thereon and is making 
further purchases from us, we must have one place where these 
several transactions can be summarized. That is, we must keep 
an account with him. Or, to speak in a more general way, to 
analyze the results of our business we must be prepared to 
determine what different branches of our operations have cost 
us, what the different branches have returned to us in income 
and what has been the final result either in profit or in loss. 
It will be necessary, then, to classify these different items under 
proper headings, these headings or titles of accounts to be self- 
explanatory as far as possible. These accounts must be so kept 
as to lend themselves most completely to analysis. Now the 
book in which the facts are so classified and summarized is 

called the Ledger. 

In the double-entry system all debit entries are carried into 
the left dollars-and-cents columns and all credit entries into the 
right dollars-and-cents columns. This is the case with the Ledger 
and all the other regular books of account. Sometimes, as in 
the Ledger, this division is accomplished by dividing each page 
into debit and credit sides by a vertical ruUng through the 
centre of the page. Sometimes, as in the Cash-Book, the two 
pages which open opposite to each other are employed as a 
couple, the left page for debit items and the right page for credit. 
Sometimes, as in the Journal, the debit and credit dollars-and- 
cents columns are side by side at the right side of each single 
page, the debit column, however, being to the left of the credit 
column. This is an arbitrary arrangement. If it had been 
originally decided to carry the debit items to the right side and 
the credit items to the left side, the accounts could have been 
kept just as accurately; but it is at once apparent that for gen- 
eral convenience there should be, the world over, a uniform 
practice in this regard. Luckily, this is the case. 

But here comes in a point that is a frequent cause of con- 
fusion, especially in the mind of the man not very familiar with 
accounts. Suppose I am keeping an account with a man. If I 




Business Engineering. 

make out a statement of that account from my standpoint; that is, 
from my side of the transactions, the amounts which I have paid 
to him will appear on the credit side of my statement, and the 
amounts which he has paid to me will appear on the debit side of 
my statement. But, now, suppose that he, from his books, renders 
the statement of account to me. Then the statement is prepared 
from his standpoint and while the two statements may be cor- 
rect and identical in every particular, not varying to the extent of 
one cent, still every item which on my statement of account appears 
on the debit side will, on his statement of account, appear on the 
credit side, and vice versa. Unfortunately, it is not always ap- 
parent from the heading of the statement from which side of the 
transaction the statement has been made. It is in such matters as 
these where the European bookkeepers are apt to be more gener- 
ally uniform and precise than those of America. 

To repeat, every item involved in our several transactions has 
been finally recorded in the Ledger and if the record has been 
correctly kept the sum of the items on the debit, or left, side will 
equal the sum of the items on the credit, or right, side, and unless 
they do so foot up to balance we must accept the fact that there 
has been an error made and we must look for and correct it. 

Before passing on, let me urge you to consider carefully the 
point above made as to the reversal of the debit and credit items 
on the two sets of books as kept by the two parties to any one 


It is necessary to fully appreciate this point to understand 
why a Ledger balances and why in posting from the Cash-Book to 
the Ledger, as later to be explained, the items on the left (debit) 
side of the Cash-Book are posted on the right (credit) side of the 
Ledger, and the items on the right side of the Cash-Book are 
posted on the left side of the Ledger. 

We now come to the question, how are these items obtained 
for the Ledger? What is the basis for this final summarized 

record ? 

The system of primary records which forms the basis for the 
Ledger entries varies very considerably, but in general we may say 
that the three main books of account are the Cash-Book, the 

Lecture Notes. 






Journal and the Ledger. Under the head of the Journal can be 
included certain subsidiary books, which perform certain parts of 
the Journal's duty. 

Let us first consider the Cash-Book. Keeping track of our 
cash expenditures and cash receipts is, of course, of primary im- 
portance. Therefore, we are warranted in maintaining a special 
book for this purpose which will contain the facts in regard to 
each transaction in some degree of detail. In this Cash-Book each 
left hand page is for debit entries and each right hand page is for 
credit entries. The debit and credit entries of even date are made 
on the pages opposite to each other. If there are more entries 
of a certain date on one side than on the other, and so one page is 
filled up while the opposite page is only partly filled, the blank 
spaces are not filled, and the next two pages are opened with 
entries of even date. The reason for using a full page for debits 
and a full page for credits instead of dividing a single page into 
debit and credit sides, is because the record should be sufficiently 
in detail and it is desirable that the record should only occupy a 
single line. 

Now let us first think of what we mean by Cash. It is an 
account kept with ourselves. If there was only one owner of the 
business, then Cash would really represent that owner. But, even 
then. Cash would have an identity of its own, as will be later seen. 
Suppose there are two partners to the business and each puts into 
the business $5,000 as capital. Then, certainly, when that money 
is put into the business for the benefit of both each man should be 
individually credited with $5,000. The business as a whole should 
credit each man with $5,000 and therefore the business as a whole 
should be debited with each $5,000 received. In the Cash-Book, 
which represents the business as a whole, these entries would apn 
pear on the debit side. When Cash receives money, that is, when 
the business receives money, it must debit itself with that receipt. 
On the other hand, when, in the course of business, Cash pays out 
money, Cash Account must be credited. 

Even in the case of a business which is owned and controlled 
by a single proprietor, the owner of the business may be concerned 
in many other enterprises, but his relation to this particular busi- 


I I 


Business Engineering. 


ness must be clearly shown in the books of this concern. Cash Ac- 
count has been made the custodian of this part of his money and, 
therefore, Cash Account must be debited and the proprietor as an 
individual is credited through an account which maybe called Cap- 
ital Account. This is more readily apprehended in the case of a 
stock company in which the capital is supplied by perhaps many 
individuals in perhaps widely varying amounts. Here it is evident 
that the business as a whole must account to each individual 
stockholder for the capital he has invested with the concern. The 
business as a whole has received the money and placed it in the 
Cash Account and hence Cash Account is to be debited and the 
individual stockholder is to be credited. This credit to the stock- 
holders is generally shown in a general account called Capital 
Stock, or Capital Stock—Common, or Capital Stock— Preferred, 
as may be necessary to indicate the character of the stock obliga- 
tion. The individual holdings are certified to by stock certificates 
issued to the stockholders. As these stock certificates are issued 
credit is given on a Capital Stock Ledger or Record; and as the 
certificates are cancelled, owing to transfer of ownership, the 
proper individual accounts are debited. This is a case of a sup- 
plementary or individual Ledger in which are given the details as 
to individual debits and credits, the general conditions only being 
shown on the General Ledger. It should be unnecessary to point 
out that the total balance shown by the Individual Ledger should 
exactly correspond with that shown by the General Ledger. The 
latter shows the amount of capital which the concern has to ac- 
count for (is liable for), and the first shows who are the individ- 
uals who own the stock and to whom the company is liable. 

Then it can be seen that Capital Account in any of these 
cases should be credited with the capital invested in the business. 
But the capital as received will be recorded in the Cash-Book, 
and as it is received by Cash, Cash will be debited. But we have 
seen that Capital (collectively and individually) should be cred- 
ited. How is this part of the record made? 

The entry on the Cash-Book is made on the left or debit 
side, and that shows that Cash is debited as it should be. But 
the descriptive matter of the entry also shows from whom the 

Lecture Notes. 


money is received and why it is received, and therefore without 
any additional entry it shows to what account and to whom 
it should be credited. So we find that the one entry on the 
debit side of the Cash-Book also records the credit side of the 
transaction. This is an important point and must be fully com- 

Now let us follow through in detail the entries covering one 
of the payments made to Cash on account of capital. We will 
assume that we have to do with a stock company; the shares 
being $100 each and issued at par. 

John Smith subscribes for 100 shares, for which he pays 
in to Cash $10,000. The entry is made on the debit (left) side of 
the Cash-Book — first the date received, then the title of the ac- 
count (Capital), then the name of the man from whom it is re- 
ceived (John Smith), and then the amount ($10,000). In due time 
a stock certificate will be issued to Smith, and on the Stock Led- 
ger he will be credited with the ownership of 100 shares of stock, 
the record including the detail as to the number of certificates 
issued, the number of shares covered by such certificates, and 
the serial numbers of the certificates. Probably a single certi- 
ficate of 100 shares would be issued and the record would be so 
made, showing the serial number of the certificate for identifica- 
tion. This takes care of the liability to the individual. 

When the other Cash-Book entries are being "posted" into 
the Ledger, from the debit entry on the Cash-Book (that is, debit 
to Cash because Cash has received the $10,000) Capital Account 
in the General Ledger will be credited with $10,000. 

So we see that in posting from the Cash-Book to the Ledger 
we post a debit entry in Cash to the credit side of some account 
in the Ledger. And this reversal in the posting is due to the fact 
that we are taking note of both sides of the transaction; if Cash 
is debited for money received from John Smith on Capital Ac- 
count, Capital Account must be credited and we must also record 
the fact that John Smith is the individual to whom the business 
is responsible for that part of the capital. We have now seen 
that Capital Account is credited on the General Ledger, and 
John Smith, the individual, is credited on the Stock Ledger. 




Business Engineering. 

Lecture Notes. 


This is not a double credit against a single debit as has 
been suggested by some of the students, because it is the Gen- 
eral Ledger which shows the liability as a whole and the Stock 
Ledger shows how this liability is divided up. The Stock Led- 
ger simply shows the details in connection with the more general 
record in the General Ledger. 

But now it may be said, There is no double entry in the 
General Ledger; there is a debit to Cash Account which is re- 
corded on the debit side of the Cash-Book and this debit has 
served as the basis for posting $10,000 to the credit of Capital 
Account in the General Ledger, but there is no debit entry m 
the Ledger to balance this credit entry to Capital. 

To this objection I reply that in the General Ledger, there 
is kept, or there should be kept, a Cash Account. This account 
will represent Cash's side of each transaction ; that is, the oppo- 
site side to that represented by Capital Account (or John Smith's 
Capital Account, if we kept all the individual capital accounts 
in the General Ledger instead of summarizing them under the 
general heading of Capital Account). Having posted the $10,- 
000 entry from the debit side of the Cash-Book to the credit 
side of the Capital Account in the Ledger, it now remams 
to post the entry into Cash Account in the Ledger. But as 
this Cash Account represents the same side of the transaction 
as that represented in the Cash-Book, we post from the debtt 
side of the Cash-Book to the debit side of Cash Account in the 
Ledger. But as all the entries on the debit side of the Cash- 
Book must be posted into the Cash Account in the Ledger on 
the debit side of that account and all the credit entries of the 
Cash-Book into the credit side of the Cash Account in the 
Ledger, we may as well wait until a number of them have 
accumulated and post them as a sum into the Ledger. The 
general custom is to "close" the Cash-Book once a month. 
During the month the individual items have been posted from 
the Cash-Book to the Ledger, item by item, to the several ac- 
counts involved, the debit items to the credit side of these Led- 
ger accounts and the credit items to the debit side of these 
Ledger accounts. Thus we have classified or distributed the 

several Cash debits and credits to the credit and debit of the 
accounts opposed to Cash in the several transactions of the 
month. Now we post the total footing of all the entries appear- 
ing in the debit columns of the Cash-Book to the debit of Cash 
Account in the Ledger, and we post the total footing of all the 
entries appearing in the credit columns of the Cash-Book to the 
credit of Cash Account in the Ledger. So we have, item by item, 
all the debit entries in the Cash-Book distributed and posted to 
the credit side of the several accounts in the Ledger and, item by 
item, all the credit entries distributed and posted to the debit side 
of the several accounts in the Ledger and all the debit entries of 
the month posted in one amount to the debit side of Cash Ac- 
count in the Ledger and all the credit entries of the month 
posted in one amount to the credit side of Cash Account in the 
Ledger. So every entry in the Cash-Book has been posted on 
both sides of the Ledger; for every debit there has been a credit 
and for every credit there has been a debit, and so the balance in 
the Ledger between debits and credits is maintained. 

Day by day, as the cash transactions are completed, that is, 
the money is received and the money is paid out, each transac- 
tion is entered up separately on the Cash-Book. Cash received 
is entered on the left page, namely the debit page, and cash paid 
out is entered on the right page, namely the credit page. The 
fact that debit entries are made to the left and credit entries to 
the right you have to memorize, for as I have said, it does not 
depend upon principle. It is an arbitrary arrangement, for- 
tunately accepted by all so that uniformity of practice through- 
out the business world is obtainable. 

Take another item : We may pay out money for the salary 
of the bookkeeper during the first month. That amount, being 
paid out by Cash, must be credited to Cash; that is, "Cash" has 
accounted to that extent for the money entrusted to it. But it 
must be charged against either the individual or some account 
which keeps track of this part of our year's expenses, say Salary 
Account or Expense Account, according to how we classify our 
accounts. Again you see that what is written up as a credit 
on the right side of the Cash-Book is posted as a single debit 


70 Business Engineering. 

to Salary Account in the Ledger : at the end of the month, the 
total footing of the Cash credit columns will be posted to the 
credit of Cash Account in the Ledger and this item of Cash paid 
to the bookkeeper will be included in this total. So we have all 
the credit items on the Cash-Book classified and distributed 
throughout the Ledger on the debit side of the accounts con- 
cerned and all these Cash credit items posted in bulk in the 
Ledger on the credit side of Cash Account. 

Of course, there should be no reversal of the posting of 
Cash, because Cash Account in the Ledger means exactly the 
same' as in the Cash Book; that is, we are considering the same 
side of the transaction in the Ledger that we have considered 
in the Cash-Book entries. From each side of the Cash-Book 
we have posted into the Ledger the implied side of each transac- 
tion, item by item. We have later posted to the same side of the 
Ledger as that in which the items appear in the Cash-Book 
the total of these items and so we have on the Ledger for every 
debit a credit and for every credit a debit, but we do not find 
them item by item. We find them in one case in bulk and m 
the other case itemized. That is, those amounts which on the 
credit side of the Ledger appear in itemized form, appear under 
Cash Account in bulk on the debit side, and vice versa. And 
so the Ledger accounts are in this case kept in balance. 

I have written this at great length and repeated myself ad- 
visedly, for I have found in my classes that the students seem to 
have great difficulty in understanding why this reversal in the 
posting from the Cash-Book to the Ledger takes place. When 
they do fully comprehend this point, they will have secured 
already a fair idea of what is involved in double-entry book- 



November, 1904. 

In this second paper on Accounting I shall deal more with 
methods than in the first paper, but I shall deliberately repeat 
myself in my desire to enforce a right understanding of princi- 

As is my practice, I shall here try to answer questions which 
have already been suggested by my talks and I shall not regret it 
if I set your minds working on other questions. 

Let me first repeat that I am not trying to make bookkeepers 
of you but to give you the opportunity to acquire a knowledge of 

Some of you have been puzzled at the distinction I have 
drawn between the accountant and the bookkeeper. 

To be an efficient bookkeeper a man should be a good pen- 
man, writing a neat and legible hand and preferably writing it 
with some degree of rapidity. He should be able to accurately 
and rapidly add long columns of figures, preferably more than 
one column at a time. He should be able to accurately and rapid- 
ly perform examples in subtraction. He should have the ability 
and temperament that would enable him to concentrate his mental 
processes continuously for many hours upon details so that he 
will not be liable to make mistakes due to absent-mindedness, 
such as reading 657 and writing down therefor 756. He should 
have a certain sharpness and alertness of mind to enable him to 
quickly determine where best to look for the sources of error 
when his accounts refuse to balance. It will also be a great ad- 
vantage if he has some inventive capacity which can so well be 
employed in devising labor-saving bookkeeping methods specially 
applicable to the business in hand. 

To be capable as an accountant, much of this skill of hand 
and readiness of performance is not actually necessary. The ac- 
countant must be able to direct the bookkeeper. Therefore, he 


Business Engineering, 

should have a complete knowledge of the principles of accounting 
and such a sufficient knowledge of business methods in general 
as will qualify him to apply the principles of accounting to meet 
the requirements of any particular business. He should be able 
to recognize where his special training should be supplemented 
by the special training of the skilled business and technical man- 
ager. He must be competent to devise such a system of reports 
as will place before the management, comprehensively and in de- 
tail, the results obtained from the business. Thus it is seen that 
he must be much more than a bookkeeper. 

It is true that most of our expert accountants are or have 
been expert bookkeepers. Through lack of practice in the actual 
performance of bookkeeping work they may have lost some of the 
mechanical and mental ability to perform accurately and quickly, 
but their thorough drill in bookkeeping is still of great assistance 
to them in the application of principles through methods to meet 
varying requirements and in the reading and understanding of 
books and accounts wherein the same principles have been applied 
by means of widely varying methods. 

We may then liken the distinction between the bookkeper 
and the accountant to the distinction between the mechanic and 
the engineer. 

Here at ''Stevens," in training you to be engineers, we put 
you through a limited drill in the shops, not with the idea that we 
can during the limited time at our disposal qualify you as me- 
chanics, but that we can give you some appreciation of the princi- 
ples involved in efficient shop practice and of how the engineer's 
designs are realized in the shop. And in this connection you are 
shown in principle, if not in detail, that the engineer must modify 
his designs to meet the requirements of the most efficient and eco- 
nomical shop practice. 

If before coming to "Stevens" the student has "served his 
time" as a mechanic, so much the better if he also has the men- 
tality to be something more than a mechanic. Thus with this 
course in the principles of accounting, it is better if the students 
have had some training in bookkeeping; such training is not, 
however, necessary and is a handicap if it leads them to depend 

Lecture Notes, 


upon their acquired knowledge of methods and so neglect this 
instruction in principles. 

Coming now to a consideration of some of the bookkeeping 
methods employed to meet the requirements of accounting, we see 
at once that these methods must provide a correct and permanent 
record of all transactions in which money or the equivalent has 
been transferred. 

The scheme through which these methods are to be applied 
and the actual practice of the methods must be such as to meet 
the requirements just as far as is possible without making the 
bookkeeping of more importance than the transactions them- 
selves : 

1. The record should be completely self-explanatory so that 
at any time in the future the exact facts in regard to a transaction 
may be recovered without the assistance of memory. 

2. All the transactions should be so classified that their com- 
bined effect over any given period or at any time during that 
period may be ascertained with ease and accuracy. 

Let me acknowledge at once that these two objects are not 
easily attained; nevertheless, we should never be satisfied with 
anything less. 

In the effort to develop a completely self-explanatory record, 
unless a controlling common-sense is continually exercised, a sys- 
tem of red-tape may be developed which will be out of all pro- 
portion to the actual requirements of the business. The engineer 
is constantly required to keep proportions in mind ; here is an ex- 
cellent place to exercise his developed faculty in that direction. 

On the Continent of Europe the bookkeeping systems are 
often burdened with red-tape. The same record is often repeated 
in various forms. Facts which are fully developed and recorded 
in books outside of the regular books of account are again 
recorded in detail in these regular books of account. 

In Great Britain and, I believe, still more so in this coun- 
try, such costly repetitions are more often avoided. 

There is something to be said in favor of each system. 
By what we may call the continental method, the full record is 
to be more nearly found in the regular books of account and. 


. H 



7^ Business Engineering. 

clerical labor being cheaper, the additional cost is not so seri- 
ous as it would be with us. 

Here we save time, which costs money, and for the ordi- 
nary run of business our records are less complicated. 

But in connection with our practice it is of still greater 
importance than with the continental practice that all our letter 
copy-books, invoice copy-books, contract books and all sub- 
sidiary and statistical book records should be accurately kept 
and carefully preserved for reference in case of future question 
or dispute making it necessary to follow the condensed record 
as found in the regular books of account back to the primary 
and subsidiary records. 

We are now naturally led to consider the question— What 
are the books usually employed in double-entry bookkeeping? 
No matter what the system of bookkeeping, certain books 
should be kept for our safety as well as for our convenience, 
such as letter-press copy-books in which every letter and every 
accompanying exhibit or enclosure should be copied unless the 
enclosures (invoices, for example) are of such a nature as to 
suggest that they be copied in a special press copy-book. In 
one book or another, all of our communications should be copied 
(preferably press-copied, as then we have a facsimile copy) be- 
fore they are sent out. 

There are other books of record, or statistical books, which 
will differ in function and form according to the business for 
which they are designed. 

Under this last head might be included the contract record 
of a contractor in which should appear first a memorandum of 
the chief features of the contract and a specific reference to the 
book in which the full text of the contract is recorded. Then 
should be entered all the items included in the contract, and 
there should be appropriate columns in which to record against 
each item the date when ordered, when shipped, when received 
as shown by the actual acknowledgment of receipt, the cost in- 
cluding freight and cartage, &c., &c., and finally the total cost 
of each item. In passing, let me point out that such a record 
is of inestimable value to the contractor provided it is consci- 

Lecture Notes. 


entiously kept up and always made to finally agree with the 
record as found in the regular books of account ; that is, with the 
Treasurer's figures of cost. Such a record affords the oppor- 
tunity to check up estimates of cost with the itemized records 
of cost in the case of completed contracts and it also continually 
reminds us of the wisdom of tabulating in advance all the items 
required in a certain contract instead of waiting for a reminder 
in the form of a notice that the work of construction is stopped 
or delayed because some little, perhaps inexpensive, part has 

been forgotten. 

There are many other such special records, the need for 
which is suggested by the varying requirements of different lines 
of business, such as the meter records of a gas company, the 
policy record of an insurance company, the car record of a 
railroad company, the time record of any industrial concern, 
record of bills payable, record of bills receivable, &c., &c. 

All these books so far mentioned we may roughly include 
in one class as auxiliary and statistical books. 

We now come to a consideration of the books included in 
the other class— the regular or principal books of account. 

These include, according to certain authorities, many books, 
some of which would be by other authorities included with the 
auxiliary or statistical class. 

For the sake of simplicity, we can say that these principal 

books of account are the 



Some authorities will claim that the Cash-Book is a portion 
of the Ledger which is set apart from the other accounts because 
this account has to be kept in greater detail and hence can be 
kept more conveniently in a book of different design from that 
adapted to the convenient keeping of the other Ledger accounts. 
Others will claim that the Cash Account is so set apart because 
cash transactions should be recorded at once, whereas all other 
entries can be posted from the Journal and Cash Account when 


Business Engineering, 

most convenient ; for having completed the chronological record 
and having kept up the cash record ready for instant reference 
nothing is risked by completing the Ledger record when not 
pressed for time. I can supply another reason; namely, that 
as it is desirable to have the Ledger records in compact form, if 
the details of Cash Account were included within the compass of 
the Ledger binding we should have either a very bulky volume 
or be obliged to frequently transfer all of the accounts to a new 
Ledger because the space taken to record the many cash transac- 
tions item by item had filled all the spare leaves; whereas by 
keeping Cash Account in a book by itself only that part of the 
Ledger has to be often renewed. 

But, reason as we may, it is found desirable to have a sepa- 
rate book in which to fully record in chronological order all trans- 
actions in which cash has changed hands. 

I prefer to treat the Cash-Book as a separate book and then 
summarize in the Ledger proper, under the heading Cash Ac- 
count, all the transactions which are given in detail in the Cash- 


This is done by "posting" from the credit (or creditor) side 
of the Cash-Book the total footings in one amount to the credit 
side of Cash Account in the Ledger, and the total footings of the 
debit (or debtor) side of the Cash-Book to the debit side of Cash 
Account in the Ledger. 

This makes the Ledger complete in itself, and a balance can 
be struck by taking off the balances of all the accounts in the 
Ledger without having to go to another book — the Cash-Book — 
to obtain the Dr. or Cr. balance of Cash Account to include with 
the other Ledger accounts. 

As this requires only the additional posting from the Cash- 
Book to the Ledger of two more items per month— namely, the 
total Dr. footing and the total Cr. footing— consuming say one- 
half of a minute a month, or six minutes a year, I can find no 
valid argument to oppose to the course I here recommend. 

Here you sec at once, we are discussing variations in the 
methods employed to put in practice the same principles. There- 
fore it is not a vital point and authorities can safely disagree. 

Lecture Notes, 


The Journal is a book in which transactions are recorded in 
chronological order with regard to both sides of the transaction 
and such explanation is included as will make the entry itself 
completely self-explanatory or will furnish such definite references 
to other books of record, naming the book and page, as will fur- 
nish a completely self-explanatory record of the entries carried 
(posted) from the Journal into the Ledger. 

Some authorities would amend this statement by saying:— 
"The Journal is a book in which all transactions are recorded, 
&c." That is, some claim that all transactions should be journal- 
ized, including all cash items which are completely explained in 
the chronological record contained in the Cash-Book. 

I prefer to use the Journal only for such entries as are not 
completely set out for posting into the Ledger in some other 
book which we include in our list of principal books of account. 

The Ledger is the book in which all the entries covering all 
transactions are stored up in convenient form for future reference. 
It is the book in which all the original entries gathered from the 
Cash-Book, the Journal and other books which may be employed, 
as later to be explained, are entered under their respective account- 
titles and in the proper columns ; viz.. Dr. or Cr. 

The Ledger, therefore, shows the final summing up of all 
business transactions and to it we refer to learn the Dr. or Cr. 
balance of any account, personal or impersonal. 

Those of you who have had some experience in bookkeeping 
may be ready to ask why I have not included in my list of prin- 
cipal books of account, the Day-Book, Sales-Book, Invoice-Book, 
Petty Cash-Book, &c. 

The Day-Book is intended to receive in chronological order 
the primary record of all transactions, including purchases and 
sales. Where the transactions are so numerous as to call for it 
as a matter of convenience, the sales are recorded in a separate 
Sales-Book and the purchases are recorded in a separate Invoice- 

But all of this can be done in the Journal, and hence these 

books can be considered as sections of the Journal. 

The Petty Cash-Book is a book in which for greater con- 




Business Engineering. 

venience the small cash payments are recorded in chronological 
order, and later carried into the general Cash-Book in one entry, 
say at the end of the month. 

So the principal books of account boil down to the Cash- 
Book, the Journal and the Ledger ; and according to English au- 
thorities the Cash-Book is merged in the Ledger, so then we have 
only the Journal and Ledger. 

I will now show a Journal, a Cash-Book and a Ledger in their 
simplest forms and include a few simple entries to show how 
these books work together. 



(A Single Page.) 



Dr. Cr. 



Merchandise, Dr. 

to Jno. Smith. 
100 bbls. ffour @ $4.50. 






Henry Herbert, Dr. 

to Merchandise. 
100 bbls. flour (^ $6. 





Lecture Notes. 



(The Dr. and Cr. items of same account are on the one page.) 








To cash. 

To Journal. 

John Smith. 





By Journal. 

Henry Herbert. 





By cash. 









To cash. 















To Journal. 






By Journal. 












Business Engineering. 






To Henry Herbert 

100 bbls. flour. 




In the Journal the entries arc made in chronological order. 
The Dr. and Cr. amounts are shown on the same page. In the 
form shown the two columns for Dr. and Cr. are side by side at 
the right of the page, the Dr. column, however, to the left of the 
Cr. column, thus conforming to the arbitrary rule that Dr. items 
shall go to the left and Cr. items to the right. The titles of the 
accounts appear in the main space in the centre, the date in the 
columns at the left. 

In the Cash-Book the entries are made in chronological order, 
the Dr. items on one page and the Cr. items on the opposite page 
to the right. In the column between the descriptive matter and 
the columns for dollars and cents are placed the numbers of the 
pages in the Ledger on which are shown the accounts to which 
the cash items have been posted. For instance, Henry Herbert's 
account is supposed to be on page 25 of the Ledger. 

In the Ledger the entries are in chronological order as far 
as each account is concerned, but the several accounts are placed 
in the book as found to be most convenient. The entries are scat- 
tered through the book, following the titles of accounts. Here the 
Dr. and Cr. items are on a single page but, unHke the Journal, 
the page is divided vertically through the centre, the left half 
being devoted to the Dr. items and the right half to the Cr. items. 

These books, especially the Cash-Book and the Journal, are 
ruled in different ways to meet the special wants of the business 
concerned or the individual opinions of the bookkeeper or ac- 
countant in charge. For instance, in the Journal sometimes the 

Lecture Notes. 







By Jno. Smith 
" Expense acct. 

100 bbls. flour. 

Webster & Co., stationery 




Dr. dollars-and-cents columns are on the left side of the page, the 
Cr. columns on the right side, and the space for descriptive mat- 
ter in between. 

Again, Cash and other books are frequently ruled with extra 
dollars-and-cents columns to receive the entries for certain ac- 
counts, leaving the one column as before for miscellaneous items. 
For instance, there might be on each side of the Cash-Book an 
extra dollars-and-cents column for Merchandise Account, for the 
reason that a large part of all the entries passing through the 
Cash-Book were on account of Merchandise. Then these extra 
columns would be headed "Merchandise Account" and the other 
columns ''General" or ''Miscellaneous." Then the total footings of 
the merchandise columns could be carried into the General Ledger 
in one Dr. item and one Cr. item at the end of the month, making 
a saving in labor, more or less important according to the volume 
of business involved. 

But the principle remains the same. 

Coming back to the examples I have given, let us trace the 
entries through the several books. 

In the Journal is recorded first the purchase and receipt from 
John Smith of 100 barrels of flour. We debit the impersonal or 
speculative account, Merchandise, and we credit John Smith with 

Then we record the sale of 100 barrels of flour to Henry 
Herbert at $5 per barrel. We debit Herbert's account and credit 
Merchandise Account with $500. Through Merchandise Account 



Business Engineering. 

we wish to keep track of the losses and gains from the purchase 
and sale of merchandise; so for all merchandise purchased we 
debit the account and for all merchandise sold we credit the ac- 
count. If at the end of a certain time we wish to ascertam the 
result of our trading in merchandise, we deduct the total of the 
debit items from the total of the credit items and the remainder 
is the gross profit from our trading in merchandise. If the total 
of the Dr. items exceeds the total of the Cr. items, it is shown 
that the trading has resulted in a loss. 

We credit John Smith with $450 because he has delivered 
to us $450 worth of flour. We debit Herbert with $500, because 
we have delivered to him $500 worth of flour. 

Coming now to the Cash-Book, on December lOth we pay 
Smith for the flour received from him, so we credit Cash with 
having paid him and this entry also implies a debit to Smith. 

On December 12th Herbert pays us for the 100 barrels of 
flour sold to him and charged on the Journal. This $500 is Dr. to 
Cash because Cash receives the money, and by implication this 
Dr. entry to Cash makes a Cr. entry to Herbert. 

On December i6th we pay out $16.50 for stationery and we 
debit this to Expense Account, to which account we expect to 
charge miscellaneous items of expense during the year, so that 
we may have at the end of the year a summar>^ of the cost of all 
the expense items included in this account according to our pre- 
determined classification. 

Now coming to the Ledger : 

We "post" the entries from the Journal and the Cash-Book 
into the proper accounts in the Ledger. 

As I have alreadv explained, the entries in the Journal are 
complete. That is, the Dr. and the Cr. side of each transaction 
is shown ; each amount is shown twice, once in the Dr. column 
and once in the Cr. column. So in posting into the Ledger we 
post from the Dr. column of the Journal into the Dr. column of 
the proper account in the Ledger and from the Cr. column of the 
Journal into the Cr. column of the proper account in the Ledger. 
But when we post from the Cash-Book into the Ledger we 
have to remember that what is to the Dr. of Cash is to the Cr. of 


Lecture Notes. 


Herbert, and that what is to the Cr. of Cash is to the Dr. of Smith 
and to the Dr. of Expense Account. 

So in posting these items from Cash-Book into Ledger we 
post from the left or Dr. side of Cash to the right or Cr. side of 
the Ledger ; and from the right or Cr. side of Cash to the left or 
Dr. side of the Ledger. 

Then, if we summarize in the Ledger the Cash Account as 
shown in detail in the Cash-Book, as I have recommended, at 
the end of the month we post the total Dr. footings of Cash- 
Book into Cash Account in the Ledger on the Dr. side, and 
the total Cr. footings of Cash-Book into the Cash Account in 
Ledger on the Cr. side. There is no reversal in the posting in 
this case, because Cash Account in the Ledger is simply a con- 
densed form of Cash Account as shown in the Cash-Book. 

If, according to the older practice, a practice still maintained 
by many, we journalized all Cash items, the entries I have shown 
in the Cash-Book would be as follows : 






10 II Jno. Smith, Dr. 

to Cash. 
Payment in full for 100 bbls. flour. 

12 Cash Dr. 

to Henry Herbert. 
Received in full for 100 bbls. flour. 

16 Expense acct., Dr. 
to Cash. 
P'd to Webster & Co, for bill of stationery 













In this case both sides of each transaction are shown. In 
the case of the first entry, we not only show the debit of $450 
to Smith, but we show just as explicitly the credit of $450 to 
Cash. As the entry is made as a basis for recording two sides 
of the transaction under the proper headings in the Ledger, it 
is apparent that we must ''post" these entries, Dr. and Cr., into 
the Ledger as they are shown in the Journal. 

But now if we omit the journalizing of Cash, and enter each 
transaction at once in Cash Account in the Cash-Book, we must 
remember that that entry only records one side of the transac- 


g. Business Engineering. 

tion and we must "post" the entry into the Ledger in the ac- 
count involved on the other side of this Cash transaction. 

So in the case of the John Smith entry as first shown m the 
Cash-Book, we must post that cash credit entry as a Dr entry 
in the John Smith account, just as much as if both sides of the 
transaction had been covered by a Journal entry. 
In the Journal I have written the entries thus: 
John Smith Dr. 450-00 

•* to Cash 450.00 

This would be just as correct and self-explanatory if written: 
John Smith 450.00 

■^ Cash 450.00 

"Dr " and "to" can be safely omitted because the Dr. and 
Cr. columns fully indicate that Smith's account is debited and 

Cash Account is credited. . . t u 

Also in the Cash-Book and Ledger on the Dr. side I have 

made the entries: 

To Henry Herbert, To Cash, and To Journal; 

and on the Cr. side: 

By John Smith, By Expense Account, By Journal and 
By Cash. 

In the John Smith Account "To Cash" signifies that so far 
as that one transaction is concer,ied, John Smith is debtor to Cash 
Account or the Cashier for money paid by Cash to John Smith. 

In the Cash Account this same transaction is recorded By 
John Smith"-which signifies that Cash Account or the Cashier 
is entitled to take credit "by" (or for) the amount paid to Smith. 

But this is all cleariy shown without the use of the words 
"to" and "by" if the double-entry system of bookkeeping is 

understood. , . „ j ..i. -> •„ :„ 

Therefore, while this use of the words "to" and by is in 
conformity with bookkeeping traditions, it is not obligatory. 

The older practice in writing the headings for Ledger Ac- 
counts, still followed generally in Europe and much less fre- 
quently here, is as follows: 

Lecture Notes. 



John Smith. 



signifying that entries on the left are to the debit of John Smith 
while those to the right are opposed or against these debits and 
therefore to his credit. 

The practice in the United States is becoming more and 
more general, I believe, to simply write over the centre of the 
account, "John Smith," omitting not only the word ''contra," 
but also "Dr." and "Cr." as surplusage. 

It must now be fully apparent that for every debit item 
carried into the Ledger there must be a like credit item; and 
for every credit item a like debit item. In this connection we 
must recollect that if we do not have a Cash Account in the 
Ledger we must consider the Cash-Book as part of the Ledger. 

Considering the Ledger accounts which I have shown, we 
find the following Dr. and Cr. balances: 

Expense Account 

Merchandise Account 

Cash Account — as shown by Cash-Book 

Showing the Drs. and Crs. balance 







What is true in the case of these few simple entries would 
be true no matter how many and how complicated the entries 
were provided the work was correctly performed. 

It will be noticed that in this Ledger balance I have taken 
no notice of Smith's account and Herbert's account because in 
each case the Dr. and Cr. items balanced or cancelled each other. 

Analyzing the figures taken from the Ledger, we find that 
by trading in Merchandise we have made a gross profit of $50, 
from which we must deduct $16.50 for expenses, leaving $33.50 
net profit, and this net profit we find as a cash asset in Cash 



g. Business Engineering. 

tion and we must "post" the entry into the Ledger in the ac- 
count involved on the other side of this Cash transaction. 

So in the case of the John Smith entry as first shown m the 
Cash-Book, we must post that cash credit entry as a Dr. entry 
in the John Smith account, just as much as if both sides of the 
transaction had been covered by a Journal entry. 

In the Journal I have written the entries thus: 

John Smith Dr. 45ooo 

to Cash 450-0O 

This would be just as correct and self-explanatory if written: 

John Smith 450.00 

Cash 450.00 

■•Dr " and "to" can be safely omitted because the Dr. and 
Cr. columns fully indicate that Smith's account is debited and 

Cash Account is credited. .. r l 

Also in the Cash-Book and Ledger on the Dr. side I have 

made the entries: 

To Henry Herbert, To Cash, and To Journal; 

and on the Cr. side: 

By John Smith, By Expense Account, By Journal and 

By Cash. 

In the John Smith Account "To Cash" signifies that so far 
as that one transaction is conceryicd, John Smith is debtor to Cash 
Account or the Cashier for money paid by Cash to John Smith. 

In the Cash Account this same transaction is recorded By 
John Smith"-which signifies that Cash Account or the Cashier 
is entitled to take credit "by" (or for) the amount paid to Smith. 

But this is all clearly shown without the use of the words 
"to" and "by" if the double-entry system of bookkeeping is 

understood. , „ „ ■ «l » :„ ;_ 

Therefore, while this use of the words "to" and by is m 
conformity with bookkeeping traditions, it is not obligatory. 

The older practice in writing the headings for Ledger Ac- 
counts, still followed generally in Europe and much less fre- 
quently here, is as follows: 

Lecture Notes. 



John Smith. 



signifying that entries on the left are to the debit of John Smith 
while those to the right are opposed or against these debits and 
therefore to his credit. 

The practice in the United States is becoming more and 
more general, I believe, to simply write over the centre of the 
account, "John Smith," omitting not only the word "contra," 
but also "Dr." and "Cr." as surplusage. 

It must now be fully apparent that for every debit item 
carried into the Ledger there must be a like credit item; and 
for every credit item a Hke debit item. In this connection we 
must recollect that if we do not have a Cash Account in the 
Ledger we must consider the Cash-Book as part of the Ledger. 

Considering the Ledger accounts which I have shown, we 
find the following Dr. and Cr. balances: 

Expense Account 

Merchandise Account 

Cash Account — as shown by Cash-Book 

Showing the Drs. and Crs. balance 






What is true in the case of these few simple entries would 
be true no matter how many and how complicated the entries 
were provided the work was correctly performed. 

It will be noticed that in this Ledger balance I have taken 
no notice of Smith's account and Herbert's account because in 
each case the Dr. and Cr. items balanced or cancelled each other. 

Analyzing the figures taken from the Ledger, we find that 
by trading in Merchandise we have made a gross profit of $50, 
from which we must deduct $16.50 for expenses, leaving $33.50 
net profit, and this net profit we find as a cash asset in Cash 

u 1 




November, 1904. 

Many authors of textbooks on bookkeeping and accounting 
make little effort to explain principles. Some set out certain 
definite rules to be memorized and expect that the students when 
they have to decide some question as to principle or method can 
select the right rule and properly apply it. This may work satis- 
factorily for bookkeepers, but certainly it cannot work satisfac- 
torily for accountants, and especially would it be unsatisfactory 
in the case of men like yourselves, who will be called upon in this 
connection to deal with principles only. 

Here it is to be noted that some of the very best textbooks 
as to methods so neglect to teach principles. But it is quite possi- 
ble that some of you who might be concerned in assisting the 
bookkeeping department of some concern to record fully and cor- 
rectly the results of an industrial business might find it of distinct 
advantage to refer to some of these authorities who are sometimes 
particularly strong on good shortcuts for the reduction of clerical 
labor. If the engineer-student had previously obtained a fairly 
good grasp of the principles, he might, working in co-operation 
with a good bookkeeper, be of great assistance in utilizing some of 
these shortcut methods. 

Many authorities place much stress upon the divisions of 
accounts. Anyone studying the subject of classification of ac- 
counts and their main divisions will soon understand that these 
divisions can be made from several different standpoints. One 
of the divisions that can be found in some of the English text- 
books is as follows : 

Real Accounts, dealing with actual property ; 

Personal Accounts, showing the record of transactions be- 
tween the owner and the various persons with whom he has 
business transactions ; 

Nominal Accounts, dealing with various forms of income 
and expenditure. 

Lecture Notes. 


As this division is studied, it will be seen that there is often 
no essential difference between real and personal accounts. They 
merge into each other. 

Another division is, Personal, Real and Imaginary Ac- 
counts ; the first two covering the same ground as shown in the 
case first cited, and the last taking account of stock and expense 

As we come to analyze a trial balance and the Journal entries 
for closing the books, we will see that Stock Account, while hav- 
ing to do with the losses and gains of the year, also has to do 
with the question of assets and liabilities. 

Another division is : 

Speculative Accounts, having to do with merchan- 
dise, real estate, interest, expense, &c., 

Non-Speculative Accounts, having to do with items 
from which neither loss nor gain is to be directly 
expected, such as cash, bills-payable, bills-receiva- 
ble, personal accounts, &c. 

Here again a modification can be brought in through the fact 
that a loss is developed by bills-receivable not being paid at their 

full face value. 

Another division is. Personal and Impersonal Accounts. 

Personal accounts are, as before explained, the accounts with 
individuals, firms and companies with which we do business and 
in connection with these accounts we must, in making our entries, 
always consider the other party to the account. 

The impersonal accounts are such as Merchandise, Expense, 
Repairs, Wages, Salaries, &c., varying with the scheme of classi- 
fication. In these accounts we have to consider only the several 
relationships between different features of our business. In the 
case of personal accounts, cross entries, that is, the debiting of 
one account and the crediting of another, cannot be made without 
taking into account the rights of the other party to the transac- 
tion. In the case of impersonal accounts, such cross entries can 
be made without doing an injustice to anyone except to the owner 


: ■* 





Business Engineering. 

or owners of the business, though, of course, the result might be 
even in this case to falsify the accounts. 

Apart from any arbitrary division of accounts, the main thing 
is to continually bear in mind that, no matter what the name of 
the account may be, we must carefully discriminate between the 
treatment of our accounts with respect to assets and liabilities, 
and with respect to income and expense. This I shall endeavor 
to point out in connection with the items of depreciation. If 
depreciation is not cared for from earnings — and I am referring 
to depreciation of plant, depreciation of manufactured stock, stock 
in course of manufacture, or material to be manufactured into 
stock — we are involving our asset accounts and drawing upon 
our capital. 

In this connection I will state a rule which it will be well 
for you to memorize and, having memorized it, to test it by the 
application of principles as we go forward in our work, and espe- 
cially when we come to the analysis of a ledger balance sheet. 

Items on the 

Left side of Ledger: — 

a. If the amount will eventually be received, it is an 

h. If the amount will not be received, it is a loss. 

Right side of Ledger: — 

a. If the amount will eventually have to be paid, it is a 


b. If it will not have to be paid, it is a gain. 

I am not giving you this rule with the idea that it shall 
be memorized to the exclusion of the principles involved, but 
rather to assist you in applying the principles of accounting and 
so making you competent to read a balance sheet without the 
assistance of any memorized rule. 

The other day I was asked by a member of this class, what 
I meant by a debit balance or a credit balance. 

The fact that such a question was asked emphasizes the 
necessity for some instruction in accounting, if only to enable 
the engineer to understand the language of business. It is not 

Lecture Notes. 


only necessary that the engineer should understand this lan- 
guage, but he should understand something of the many dialects, 
or certainly he should know that there are many different dia- 
lects; that is, many different forms of expression though based 
upon the one mother tongue. 

A debtor, or debit, balance is the amount by which the Dr. 
side of the account exceeds the Cr. side. 

A creditor, or credit, balance is the amount by which the 
Cr. side of the account exceeds the Dr. side. 

A question recently asked and many similar experiences 
indicate that the relation of Cash to the business in which Cash 
is concerned is at times very puzzling. 

Let us consider for the moment that the owner does nothing 
for himself and consequently assume that when a person pays 
in a sum of money to the owner's business it is not he (the 
owner) who receives it, but his cashier or his Cash Account that 
receives it for him and is accordingly his debtor for the amount 
received. The cashier has received the money on behalf of his 
employer and therefore is liable for it and must subsequently 
account for it. Until he so accounts he is a debtor for the 
amount so received. 

If, then, the cashier is made debtor for each amount which 
he receives on behalf of his employer, we must make him as far 
as any one transaction is concerned the employer's creditor when 
he pays out money on behalf of the employer. 

If we balance up between the Dr. items and the Cr. items 
we may find that the cashier is still debtor for a balance of cash 
on hand; but, nevertheless, he has been made creditor for each 
item of cash paid out; and it is by balancing up, or placing 
against each other, the Dr. and Cr. items that we learn the final 
result as to whether there is a Dr. or a Cr. balance. If there 
is a Dr. balance of cash it indicates that the cashier being debtor, 
there is a balance of cash in his hands for account of the owner. 
If there is a Cr. balance to Cash Account, it indicates that there 
is a deficit — there is no cash on hand, but there is money owing 
to the cashier. 

This relationship of Cash to the business should be turned 



Business Engineering. 

over in the mind and viewed from different standpoints, and 
especially you should get into the habit of looking at the transac- 
tions as shown on the books of account from the standpoint of 
the outsider; that is, you should develop the capacity of cor- 
rectly interpreting a statement of account whether you look at 
it from the standpoint of the owner or the standpoint of some 
one doing business with the owner; you should acquire the habit 
of seeing the two sides of each transaction. 

The other day a question was asked as to what I meant by 
my reference to the use of blanks and whether certain monthly 
reports had been made up on regular printed forms prepared 
for that specific purpose. 

A scheme of accounting which has to do with a business 
of any magnitude should provide for a minimum of clerical labor 
by including printed forms or blanks to meet all cases which are 
continually recurring. Manifestly, it would be absurd to have 
a printed form or blank for cases coming up only at long inter- 
vals, but it would be equally as absurd to write out in each case 
all the words and figures of a communication or of a report if 
from time to time such a communication was varied only in 
certain parts. 

There are many advantages in such a system of printed 
forms or blanks; I will mention four which at once occur to me. 

1. It lightens the labors of the one writing the communica- 
tion or report. 

2. It serves to remind the writer what information is re- 
quired. This is particularly important, because the memory 
cannot be safely relied upon in the press of business. 

3. It presents the information to the one for whom it is 
intended according to a uniform style and practice, greatly re- 
ducing his labors, especially by facilitating calculations and com- 

4. It simplifies and facilitates the operations of filing; that 
is, the storing away in definite form for future reference — one of 
the most important features of the recording department of a 
large and complicated business. 

Much saving of labor and greatly increased efficiency can be 

Lecture Notes. 


obtained through a well-developed, common-sense system of 
printed forms. 

I can point out a somewhat different direction in which 
blank forms can be used to very great advantage, insuring 
greatly increased efficiency in the actual performance of duty 
and finally leaving the records in much more complete form 
than could otherwise have been provided for. I will refer to 
only one case, which, no doubt, is more or less familiar to all 
of you but which- can be used very well here as an illustration. 
Railroads' have to do with an immense amount of detail 
in their several departments, and especially in the operating 
department. Blank forms, in almost infinite variety, are em- 
ployed to facilitate prompt and accurate action and the main- 
tenance of correct records. It can be seen that especially in the 
case of instructions to be sent over the wire it is important that 
they should be conveyed to the one to be directed with absolute 
accuracy and at the minimum cost in time. The instructions 
must be condensed as far as possible without sacrificing clear- 
ness and explicitness. 

Take the case, for instance, of a wreck. The conductor 
must get the news to the proper officials without delay. If he 
had to write out every word required to make a correct and 
comprehensive report he would have to write many minutes 
longer than when using a blank form and there would thus be 
an unnecessary delay in conveying the information to the officials 
from whom instructions and assistance are required. Further- 
more, at such a time of mental stress, his memory could not be 
relied upon, for we find that memory cannot be depended upon 
even at times when the conditions are normal. 

To meet this a blank is used by the railroads, which has 
spaces for every item of information which past experience has 
shown it is necessary should be dispatched on such occasions. 
Opposite each of these spaces are certain words which ask a 
direct question and in each case the question is indicated by a 
cypher, either a letter or a number. The conductor of the train 
which has been involved in the accident proceeds to the nearest 
telegraph station on his line and calls for this blank form, "Acci- 


Business Engineering. 

dent Report by Telegraph." He fills in the blank spaces as 
required and, as I have said, he is thus reminded of each item 
of information which the operating department will require of 
him. As soon as the blank is filled up, the operator calls for 
the operator at the other end of the line and tells him to provide 
himself with "Accident Report by Telegraph" blank. The 
operator at the scene of the accident then gives the cypher in 
each case, followed by the information which the conductor has 
filled in the space, and so he goes down through the whole blank 
and promptly conveys to the operating department the informa- 
tion required to meet the emergency which has arisen. The re- 
ceiving operator, as soon as he receives the cypher, turns to 
that space in his blank and fills in all that comes over the wire 
until the next cypher is signalled. 

It can be readily seen that not only does this give the oppor- 
tunity for the operating department to promptly and efficiently 
do everything possible to correct the troubles brought about by 
the accident, but a complete record is furnished which can be 
referred to with confidence in case of lawsuits or other troubles. 

Furthermore there are other advantages, because such a 
system, carried out completely, must lead to great saving in the 
expenditures for wages, and also must lead to reductions in the 
cost of plant: for, take the case just referred to; a single wire 
would be capable of conveying a much greater volume of 
information when so much of that information is reduced to 
cypher form. Of course, if the use of telegraphic blank forms 
were confined to reporting wrecks, this item of investment and 
maintenance would be unimportant, because the number of acci- 
dent reports is limited. However, an immense number of blanks 
are in constant use for other purposes which require the use of 
the telegraph, namely the reporting of the movements of cars 
in trains and their presence at stations, reports of conductors 
from distant points showing the make-up of their trains, reports 
of freight and coal at various places along the line, &c., &c. 
Such reports as these constitute an important percentage of the 
telegraphing each day. 

But there is a danger in this connection ; namely, the danger 

Lecture Notes. 


of going to extremes — a danger to be always feared and avoided. 
System, over-developed, becomes red tape and that perhaps is to 
be avoided almost as much as the lack of system. A proper ap- 
preciation of the value of performance should go ahead of appre- 
ciation of the value of properly recording the performance. The 
keeping of the records should not over-shadov/ the development 
and maintenance of a proper system for the carrying on of the 
business. The greatest efficiency in performance and the most 
explicit and convenient forms of record are of great importance 
and should go hand in hand. The keeping of a reasonably com- 
plete and detailed set of records helps to increase the profits from 
a given volume of business and also helps to increase the volume 
of business. Unless by the records results can be accurately 
analyzed it is difficult and often impossible to eliminate weak- 
nesses and uneconomical items of management. It is not sufficient 
to know that your business is profitable as a whole; you should 
know what are the results, step by step. 

In connection with our tremendous development in industrial 
lines there is springing up a new business; namely, that of the 
industrial engineer, or engineer-accountant, or economy engineer ; 
for these and other titles have been used. Two or three of our 
graduates are experts in this line, and we may well mention Mr. 
Frederick E. Taylor, Mr. Henry L. Gantt and Mr. E. R. Doug- 
las. Men to be competent in this line must be well qualified in in- 
dustrial matters, especially shop practice, and also qualified as ac- 
countants. They must be capable of analyzing the records and 
accounts of a business so that they can detect uneconomical steps 
in shop practice and management; and, having detected such 
weaknesses, they must be competent to devise methods for im- 
provement. Sometimes these methods of improvement have to 
do with changes in the system of management or of control, and 
sometimes they have to do actually with changes in processes of 
construction. It will, therefore, be seen that the field is a very 
wide one and calls for ability of a high order, re-enforced by wide 

Any system of shop cost records should furnish the means 
for comparing, month by month, every item of cost. If such an 



Business Engineering. 

inspection of the records shows that during a certain month a cer- 
tain item of cost has been increased, at once it is suggested that 
an investigation should be instituted to learn the cause or causes 
of this increase. It is only by such continual exercise of intelli- 
gence and vigilance that the costs of a large business can be kept 
within competitive limits. 

Apart from this question of comparison, there is constantly 
an immense waste of time and nerve force through the lack of 
well-arranged records, this deficiency making it necessary to "dig 
out" information which ought to be at hand complete and ready 
for use as required. Not only is time thus wasted, but busy men 
have their burdens immensely increased by the pressure resting 
upon them through duties unperformed. Often the hardest part 
of a task is getting the work started, and this because we have 
not at hand certain data which we have previously developed but 
which is not now in form for ready reference. 

In this connection I may well refer to the advantages of the 
card system. There are concerns now that make a specialty of 
working up to order card index schemes for all special cases, 
supplying not only the cards but also the furniture required to 
make the scheme complete. I can remember the time when a man 
who adopted the card system had to work up his own scheme, 
have his own material manufactured and then secure a result 
far inferior to what can now be secured at small expense through 
the services of experts in that line. 

If a card system is adopted for the filing of data collected 
outside the office, some systematic scheme must be developed 
whereby these notes will be from time to time passed into the 
hands of those responsible for the maintenance of the card 
scheme. One good arrangement which does away with the ne- 
cessity of doing the work twice is to keep in your pocket a bunch 
of cards, of convenient size, keeping the blank cards in one side 
of a wallet, say, and those which have been written on in the other 
side. As it becomes necessary to make a memorandum of data 
obtained, it can be filled in on one of these cards and the card 
then put in with those ready for filing. From time to time the 
cards written on can be passed over to the filing clerk and another 

Lecture Notes. 


supply of blank cards placed in the wallet. This arrangement 
can be supplemented by having envelopes of exactly the same 
outside dimensions as the cards so that when a newspaper clip- 
ping or the like is secured it can be filed in one of these en- 
velopes, and as the envelopes are of the same outside dimensions 
as the cards, the pack can be conveniently manipulated. 

I shall now turn to the consideration of depreciation because 
in treating that part of my subject I shall necessarily have to refer 
to the principles of accounting. Having covered, as far as time 
will permit, the subject of depreciation, I shall return to account- 
ing and especially the analysis of a balance sheet. 



November, 1904. 
Because I have found that many engineer-students find it 
difficult to understand why depreciation of plant must be made 
good out of the profits of a business, I shall not hesitate to 
frequently repeat myself in the following notes. 

Unless depreciation of plant, and depreciation of any prop- 
erty in which capital is invested, is treated as a charge against 
the gross profits, the capital must necessarily be impaired. 
Let us take a very simple case. 

Suppose a young man without capital is desirous of engag- 
ing in a business requiring capital— say trading in pumps. A 
friend offers to supply the capital for an agreed upon interest 
on his money. The young man buys 100 pumps and com- 
mences to make sales. As the pumps are paid for, the money 
is turned in to the young man's cash account, and as demands 
are made upon his private purse, he meets these demands with 
this money— the total proceeds of his sales. 
The stock of pumps he does not renew. 
It certainly requires no argument in this case to show that 
he has spent the profits from the sale of the pumps and also 
the principal intrusted to him by his friend. 

Following this line of thought, it can be seen that each time 
a pump is sold not only must another pump be bought to re- 
place the one sold, or enough money be set aside for this pur- 
pose when the proper time comes, but, before claiming any profit 
on the transaction, there must also be set aside out of the pro- 
ceeds from the sale enough to pay the pro rata of the year's 
expenses and of the year's interest to be paid to his friend for 
the use of capital. 

If 100 pumps, alike in character and in value, are sold 
during the year, then from the proceeds of each pump must be 

Lecture Notes. 


deducted one one-hundredth of the year's expense, one one-hun- 
dredth of the year's interest and the original cost of the pump 
before a profit can be claimed. 

This is such a self-evident proposition that it hardly seems 
worth while to bring it to the attention of a class of intelligent 
men. But it is because this self-evident proposition is lost sight 
of m accounting that so many failures occur in the industrial 
field; for it must be apparent after a moment's thought that it 
IS just as necessary for the manufacturer to maintain, out of 
his profits, the full value of his plant as covered by capital in- 
vestment as it is for the tradesman to keep up his stock in trade. 
You are all, probably, familiar with the fact that in properly 
conducted concerns engaged in trade— large and small— before 
they make up their statements to cover the results of the year's 
busmess, they have to take stock, as it is called; that is,^ they 
have to go through their stores and warehouses, carefully list 
everythmg that is on hand, determine whether it has depreciated 
in value, and so finally arrive at as correct as possible an estimate 
of the present value of the stock in hand. If that present value 
proves to be less than the value as shown by the books of 
account, the diflference must be charged up as one of the items 
of loss for the year. 

This all goes to show the constant care and vigilance that 
must be exercised by the accountant or bookkeeper to insure 
the complete separation of the capital, or investment, accounts 
from the mcome, or expense, accounts. And in the case of an 
mdustrial undertaking this matter should not be left to the 
accountant or bookkeeper alone, but the responsibility should 
be fully assumed by the manager, who probably would be (under 
modern conditions) an engineer. The necessity for the manager 
not delegatmg this authority and this responsibility to others 
exists through the fact that neither the accountant nor the book- 
keeper IS necessarily qualified to decide many of the points in- 
volved in the distinction between extensions or betterments and 
repairs or maintenance of plant. Frequently a nice discrimina- 
tion IS here necessary. In deciding all such questions the con- 
servative manager should give the benefit of the doubt to his 



Business Engineering. 

investment accounts and charge all debatable items to repairs or 

Let us consider in some detail how a plant depreciates. 

This depreciation can be divided into three classes: 

1. Certain minor parts of the plant break or become so 
inefficient that they have to be repaired or replaced by new 
parts. These repairs and replacements are paid for out of in- 
come and should be charged up as part of the expenses of the 
year in which they occur unless they are made part of an inclu- 
sive yearly charge estimated to cover all repairs, renewals and 

2. Certain parts, greater in value, break down or become 
inefficient and they have to be repaired or replaced by new parts. 
These repairs or replacements may be paid for out of income 
and then charged up as part of the expenses of the year in which 
they occur, or the cost may be distributed over a number of 
years according to the number of years the repaired or replaced 
part has done duty; or they can be included in a general item 
as referred to in connection with No. i. 

3. But even when all the repairs and replacements a9 cov- 
ered in No. I and No. 2 are made, the plant as a whole is not 
maintained at its original value, even though it may be thus 
from time to time restored as far as possible to its original 
efficiency. In spite of these efforts to maintain the plant at par 
value, it will gradually age and there is beside the liability of 
its becoming obsolete. 

In spite of repairs and replacements, the plant as a whole 
will finally need to be renewed. It is not to be understood by 
this that the whole plant will necessarily have to be rebuilt at one 
time. But whether the plant is renewed as a whole, or part by 
part, the- renewals must be made and cannot be obviated by cur- 
rent repairs or renewals. 

In a general way we speak of this final renewal of plant, 
made necessary by depreciation or aging, as if the plant were to 
be rebuilt as a whole at some time in the future, but such would 
be an extraordinary case. One part of the plant we can reason- 
ably expect to last perhaps for fifteen years ; another part, twenty 

Lecture Notes. 


years; another part, twenty-five years, and so on. Often well 
constructed masonry buildings (part of the plant) will last so 
many years that the chance of their becoming obsolete has to be 
considered rather than their actual wearing out or aging. 

A little thought must show that if we are to keep intact that 
part of our capital invested in plant, we must pay from each 
year's earnings for the repairs and replacements mentioned under 
No. I ; and we must pay for the more serious repairs and replace- 
ments mentioned under No. 2 either out of the year's earnings in 
which they are made or we must set aside from each year's earn- 
ings an amount which we estimate will be sufficient to cover the 
year's share of these deferred repairs; and finally we must set 
aside out of each year's earnings an amount sufficient to compen- 
sate for the final depreciation described under No. 3. 

Generally the current repairs and replacements (No. i) can 
be made a direct charge against the year's earnings without dis- 
turbing the uniformity of net profits which is so desirable. 

As all the items included in these three classes of expenditure 
on account of maintenance of plant are to be provided for out of 
earnings, the yearly net profits will be caused to vary widely if all 
the payments made for repairs, replacements and final renewal of 
plant have to be paid for out of the earnings of any one year in 
which these payments are made. It is at once evident that the 
final renewal of plant (depreciation) cannot be paid out of the 
earnings of any one year. 

Then just so far as is necessary to prevent wide fluctuations 
in our operating charges we must provide in advance for part at 
least of these expenditures by regularly setting aside part of our 
earnings to meet the accrued and accruing liability due to depre- 
ciation of plant. If we decide to meet that part of the loss from 
depreciation which shows itself in the necessity for repairs and 
minor replacements from time to time by including the cost of 
these items in the expenses or losses of the year in which they 
are made, we still have no provision for paying the cost of the 
deferred repairs or renewals nor for the final renewals or depre- 
ciation ; and these last two are just as real liabilities as the current 


Business Engineering. 

It may be well to stop here a moment to speak more directly 
on this subject of accruing liability, something of vital importance 
in connection with the correct keeping of accounts and the prepa- 
ration of correct statements of Loss and Gain. 

Let us suppose that a manufacturing concern has to pay a 
large royalty on some patented invention and that by agreement 
the payments on this royalty are to be made semi-annually. Sup- 
pose there is prepared a complete statement of the results of each 
month's operations — that is, a monthly statement of Loss and 
Gain. If in the statements made for the months in between the 
months in which the royalty settlements are made, there is no 
mention made of these royalties, it is apparent that the profits for 
two months of each year will be called upon to meet a large item 
of cost which should be spread evenly or pro rata over the twelve 
months of the year. Thus it will be made to appear that during 
certain ten months of the year the operating cost has been much 
lower than during the other two months. It is quite possible that 
a most superficial examination of these monthly statements would 
show the reason for this wide variation in the rate of profit, but 
some calculation on the side would still be required to show what 
would be the facts in connection with an exact and fair compari- 
son. The obvious comment on such imperfect monthly statements 
is — "Why not make them complete and self-explanatory in them- 
selves?" This means, then, that every statement of Loss and 
Gain should include not only the actual payments made during 
the period covered by the report but also every item of accrued 
and accruing liability. It makes no difference whether the actual 
payment has been made or not, if the fiscal period covered by the 
report is, under the conditions of the business, required to meet 
a certain liability, that liability must be included in the expense, 
cost or loss items of the period. 

And the same is true with regard to the income items. In 
the royalty case cited, considering the other party to the trans- 
action, the receipts are not applicable to the month alone in which 
they are received but they are applicable to each month of the 


Now what is important with regard to the monthly state- 

Lecture Notes. 


ments of Loss and Gain is much more important with regard to 
half-yearly and yearly statements, because on these latter we base 
our calculations as to the division of profits — the paying of divi- 
dends. If a considerable item of accrued liability is omitted from 
our yearly statement of Loss and Gain, to that extent our profits 
are shown greater than they are in fact, and if the total profit for 
the year is paid out in dividends, to that extent the dividend is 
paid from capital or surplus, but certainly not from the earnings 
of the period. 

From this it is to be seen that in all statements of Loss and 
Gain, and especially those upon which dividends are declared, all 
accrued losses or liabilities and accrued gains or assets should be 

Following this point a little farther, if these accrued debits 
and credits are to appear in the statements of Loss and Gain, 
they should first appear in the regular books of account. I spe- 
cifically make this point, unnecessary as it may appear to some 
of you, because too frequently I have found that a statement of 
Loss and Gain was first made from the regular books of account 
and then by notes or comments, written or verbal or both, the 
actual facts were developed. I recently discovered in the case of 
a manufacturing concern in which I am pecuniarily interested 
that the statements of Loss and Gain prepared from the books of 
account were completely misleading and that it was necessary 
to supplement these statements of account by information on the 
side, part of it recorded in letter-books, part of it in pocket mem- 
oranda and part not recorded at all. Special discounts had been 
allowed but not regularly recorded; special settlements of dis- 
puted accounts had been agreed upon, but pending the actual set- 
tlement, no record of the agreements had been made on the books 
of account ; certain depreciation in manufactured goods had been 
definitely acknowledged, but these goods were still carried on the 
books of account at their full original cost ; and so on. This is 
not an extraordinary case. The man responsible as General Man- 
ager was not an inexperienced man; on the contrary, he was a 
man of wide experience, well versed in the principles of account- 
ing as applied to industrial and commercial affairs, and a man 


ft f 


Business Engineering. 

who had before always successfully managed the concerns in- 
trusted to his care. 

His fault originated in three causes : 

1. The commercial and shop details of this business were 
quite different from those of the businesses in which he had pre- 
viously been interested. 

2. He did not surround himself with efficient assistants, and 
as a result he was over-worked to the point of being threatened 
with complete nervous collapse. He was obliged to devote so 
much of his time to certain details in the shop and the counting- 
room, that certain other details were completely neglected and 
there was no time left to maintain a general and comprehensive 
view of the field. 

3. As the results from the business failed to completely 
verify his somewhat rosy predictions, he did not try very hard to 
keep in view and on record his accrued and accruing liabilities. 
And this without any deliberate intention to deceive. It would 
have been difficult for him in any case to have maintained at all 
times a completely accurate record of the modifications of his 
transactions. Pressed upon as he was by the conditions I have 
named, and being anxious not to unnecessarily alarm those who 
had invested in his concern, naturally the reports failed to show 
the facts. 

And let me warn you that this case I have cited is only one of 
many which have come under my personal observation and that 
you must be prepared to meet such conditions in the ordinary run 
of business. Those of you, especially, who may be called upon to 
report upon the value of industrial properties, must appreciate 
that no final estimate can be made until there is complete accord 
between the engineering or technical side of the report and the 
accounting or commercial side of the report ; and in order to be 
sure that there is this accord the engineer or technical expert must 
at least be able to understand, without the assistance of an inter- 
preter, the accounting portion of the report. I have been called 
upon to investigate many a case worse than the one cited, and, I 
am sorry to say that in some few cases it was quite apparent that 

Lecture Notes. 


the faulty statements of Loss and Gain were the result of deliber- 
ate and studied effort to deceive. 

Coming back to the matter of accrued and accruing losses 
and gains, let me give you one example on each side which are 
almost always to be found involved in the business of industrial 
concerns — taxes and insurance. 

Taxes are frequently paid after or at the end of the time cov- 
ered by the assessment. 

Insurance is paid in advance. 

Then in the first case we have an accruing liability and in 
the second case we have an accru^c? asset. 

Each month we should show in our monthly Loss and Gain 
statement, the amount we estimate will have to be paid for 
taxes as applicable to that month. And until the facts are 
actually obtainable we must estimate as accurately as possible. 

And the total of the monthly charges for unpaid taxes so 
far accrued must appear on the books as an accrued liability. 

In the case of insurance, the advance payment will be 
charged to "Advance Insurance Premiums," or some account 
with equivalent title, and, month by month, the month's pro 
rata will be charged to the expenses of the month, and credited 
to "Advance Insurance Premiums Account." 

The original debit of the total premium to "Advance In- 
surance Premiums" will show that amount as an asset — we have 
invested a certain amount of money in insurance, the insurance 
company yet having to render service therefor. 

As each month we charge up (debit) the proper expense 
account with the month's pro rata of this insurance premium 
(that is, take it out of the investment class of debit items, into 
the operating cost, expense or loss class of debit items), and 
credit it to "Advance Insurance Premiums," we reduce, as we 
should, the amount to the debit of "Advance Insurance Premi- 
ums"; that is, we reduce the value of this item of our assets. 
The insurance company has now rendered service for this 
month's premium paid in advance and hence at first an asset, 
and the month's pro rata of total premium has become one of 
the month's items of expense. 


Business Engineering. 

I have thought this to be a good place to step aside from 
considering the subject of depreciation, to consider the more 
general subject of accrued and accruing liabilities and assets. I 
have purposely introduced some of the steps in accounting in- 
volved in the recording of some of these items which have to do 
with the future either as to payment or liability. 

I quite appreciate that it may be difficult for many of you 
to follow the steps shown in this case of insurance premiums. 
Let me encourage you to make a real effort to comprehend the 
points involved in these entries. Success will mean that you 
have made a long step toward an understanding of the principles 
of accounting and double-entry bookkeeping. 

Coming back now to the subject of maintenance of plant, 
including repairs and depreciation (or if we prefer, current re- 
newals, deferred renewals and final renewals) we find that for 
each division of time covered by a statement of loss and gain 
there should be included in that statement a pro rata charge 
or pro rata charges to include the several items of maintenance, 
so that each such division of time will be called upon to carry its 
share of the burden but no more. 

A moment's thought makes it apparent that even in the 
case of current repairs and replacements included in Class No. i, 
each item should be spread uniformly over the time through 
which the part repaired or replaced has done service: that is, 
each of these items should have been treated in advance as an 
accruing liability. This could be done and sometimes is done, 
by setting aside each year out of earnings, a certain estimated 
amount to meet this accruing liability as part of one inclusive 
maintenance charge, as later to be explained in connection with 
Class No. 2, deferred renewals, and Class No. 3, final renewals 
or depreciation. 

But as a rule the scheme for providing for deferred renewals 
(based, as it is, largely on estimate) is much simplified if we pay 
each year out of the year's earnings the ordinary current repairs 
and replacements, leaving the deferred renewals and final renew- 
als (depreciation) only to be treated as accruing liabilities. 

The ordinary current repairs can generally be charged direct 

Lecture Notes. 


against the year's business without causing any radical fluctua- 
tion in rate of profits, because, if we eliminate the items to be 
included in the other two classes, Nos. i and 2, the direct 
charges made on account of current repairs will probably be 
found not to vary greatly in yearly totals. 

Coming now to the items included in Class No. 2, the case 
is quite different. These repairs and renewals are much more 
serious in character. They are of more occasional occurrence 
and to charge them up to the expenses of the one year in 
which they occur would at times seriously detract from the 
accuracy of the several yearly statements of Loss and Gain. 

That is, the year in which some extraordinary repair or 
renewal was paid for would be called upon in the statement of 
that year's Loss and Gain to bear the total cost while the other 
years which had had the benefit of the service of this part of 
the plant would have been relieved of all cost therefor. 

To cover these items, then, it is better to set aside from 
each year's earnings an amount which we estimate will be suf- 
ficient to meet these deferred renewals when they come to be 

Coming to Class 3, depreciation or final renewal of plant, you 
are now prepared to appreciate the necessity of providing for this 
accruing liability by setting aside for the purpose a certain per 
cent, of each year's earnings. 

To cover this item the first step is to estimate the probable 
life of each part of the plant, taking into consideration the class 
and character of plant, its design and construction, the way in 
which it is operated, and especially whether it is over-worked or 
not, whether it is kept in good repair, and whether the cost there- 
of is charged year by year against the profits. In arriving at an 
estimate of ultimate life of plant we therefore have to take into 
consideration questions as to other features of our practice in ac- 
counting as well as questions in connection with the design, 
construction, operation and maintenance of the plant itself. 

Each part of the plant should be examined, and taking ad- 
vantage of our own experience and that of others and bearing 
in mind the special conditions already referred to, we should 


Business Engineering. 

arrive at an estimate of the final length of life of each of these 
parts. Here is required the trained judgment of the engineer or 
technically trained manager. 

For each of these parts we must set aside each year such an 
amount that with the accumulations of compound interest, there 
will be sufficient to pay for the renewal of this part at the end of 
its estimated length of life. 

It now becomes necessary to decide what rate of compound 
interest can safely be depended upon through the term of re- 
demption. Here comes in the trained judgment of the banker. 

Next we have to calculate what amount, compounded yearly 
at the rate of interest we have assumed to be procurable for the 
full term, will produce at the end of that term (n years) the value 
of the part of plant under consideration. When the amount to 
be set aside for each part of the plant is determined, we can sum 
up the several amounts so obtained, and dividing this total yearly 
charge by the total cost of the plant we arrive at an average per 
cent, of the total cost of plant, which can conveniently be used in 
calculating each year the total amount to be set aside against de- 
preciation. As additions are made to the plant, the depreciation 
of these parts must also be provided for. If these additions to 
plant do not disturb the balance of our life table, we simply have 
to take this average per cent, on the increased cost; otherwise 
we have to establish a new life table for the parts added, using 
the original average per cent, on the original cost of plant. These 
two average per cents, could be combined to give us a final 
average per cent, up to date, again to be amended as necessity 


Finally we have to so place the record on the books of ac- 
count that the yearly statements of Loss and Gain will show the 
actual facts and that there will be a continual warning on the 
Ledger and balance sheets against diverting from the prescribed 
purpose these amounts so set aside each year. 

To arrive at the per cent, of original cost necessary to cover 
depreciation it is the custom with many to accept without question 
the dictum of text books and especially of books on accounting. 
It mav be of value to consult such works, but if so it must be 

Lecture Notes. 


understood that no general rules can be established for application 
in all cases. The life of a plant must necessarily depend upon 
many special and local conditions and especially it must depend 
upon how the plant was originally built and how it is being oper- 
ated and maintained. 

Consider two extreme cases, one where plants are well de- 
signed, well constructed and, while being operated within their 
capacity, are carefully kept in repair, and the other where they 
are poorly designed, poorly constructed and, while being operated 
beyond their capacity, are not kept in repair. That the deprecia- 
tion in the value of plant will be insignificant in the first case as 
compared with the second case, and that therefore general life 
tables cannot be applied without detailed examination of the plant 
in each case, must be apparent. 

Here then, as I have said, must be brought into play the 
trained judgment of the manager who, preferably, has obtained 
his training first in the school of technology and later in the school 
of experience. 

Each part of the plant should be carefully investigated and 
classified according to its probable length of life. The total value 
of the plant should be split up among these several classes. A 
working life having been assigned to each of these classes, it 
should be assumed that at the end of each of these life periods the 
parts of the plant which have been included in this class must be 

I have shown that deferred renewals or extraordinary re- 
pairs, as we may regard them (Class No. 2), should be provided 
for by building up a fund by yearly payments from earnings. 

This accruing liability can be provided for by including it 
with the accruing liabiHty for final renewals or depreciation (Class 
No. 3) now under consideration. 

Then in making up our final life table we assume that certain 
minor parts have been replaced and paid for under the head of 
current renewals or repairs (Class No. i) out of each year's 
profits, but that the deferred renewals (Class No. 2), and the final 
renewals— depreciation— (Class No. 3) can be grouped together 


Business Engineering. 

so that the one yearly deduction from earnings shall cover all 
accruing liability for maintenance of plant. 

While it is true that a plant as a whole will depreciate in 
value in spite of all that is done to repair breakages, renew in- 
efficient parts, and the like, it is possible that some portions of 
the plant may be fully kept up to original value by current 
repairs and renewals. 

To take a very obvious case — the life table established to 
cover depreciation might omit certain of the parts which are of 
short life, it being part of the general scheme to renew these 
parts out of current earnings. As has been already explained, 
this might in some cases lead to an uneven distribution of the 
cost of repairs, but it should be recognized that if such a plan 
is followed it will materially alter the life table as applied to 
accruing liabilities for maintenance. 

A case in point might be the mains of a gas company, which 
are usually composed of cast iron pipe. In many soils cast 
iron pipe will not deteriorate rapidly, even if it will deteriorate 
at all from the outside. These cast iron pipes will take on a 
scale of oxide of iron which will protect them from further 
oxidation. The inside of the pipe is not subject to oxidation, 
but to the contrary the inner surfaces are rather protected by 
the hydro-carbons in the gas. I have myself carefully examined 
pipes which have been down fifty years and, as far as the quality 
of the iron was concerned, there seemed to be no impairment. 
Of course, it is quite possible that disturbances of the bed on 
which the pipes lie, due to the digging up of the streets for 
sewers and the like, might greatly destroy the value of the 
pipes; but this in the case of a well-conducted company might 
rather indicate that there was no necessity for including a yearly 
charge for depreciation because these troubles would have been 
cared for from time to time and the repairs would have been 
paid for out of the current earnings. In such a case it is quite 
possible that at the end of five, ten, fifteen, twenty or twenty- 
five years the main system in general might be in more effective 
condition for economical operation— that is, the delivery of gas 
without leakage — than when first laid. The weaknesses, as they 

Lecture Notes. 


made themselves evident, might have been corrected and the 
cost paid for out of current earnings. This serves again to 
point out that in making up a life table it is necessary to examine 
not only the conditions as to the plant itself, but the conditions 
as to the accounting methods followed. 

It may be well to here point out that the case of cast iron 
pipe as used for gas is very different from the case of the same 
pipe used for water. In the latter case it is the practice to coat 
the pipes inside and out with tar and I have found that some 
engineers are of the opinion that the coating is necessary or an 
advantage even on the outside of the pipe. The real advantage, 
however, is that it prevents oxidation of the inside of the pipe, 
for the water passing through carries with it more or less oxy- 
gen from the air; oxidation results; the pipe is reduced in 
thickness, because the scale as formed is carried forward by the 
push of the water, thus depreciating the pipe and developing a 
continuing trouble in connection with the operation of the plant, 
due to the scale being deposited in valve seats and the like. 

So in the case of water mains we are warranted in expect- 
ing less depreciation if they were coated before they were laid. 
But with gas mains the case would be just the opposite, for the 
tar coating is a distinct disadvantage. Not only is it not needed 
for protection, as explained, but the tar deposited on the outside 
of the spigot ends and the inside of the bells is attacked and 
dissolved by the hydrocarbons of the gas and so these two tar 
films which are included in the caulked joint are carried away 
and leakage results. So definite is this fault that experienced 
gas engineers only accept tar-coated cast iron pipe when they 
find it impossible to obtain the uncoated pipe to meet an imme- 
diate demand, and in these cases they are careful to burn off all 
the tar from the spigots and bells. 

The conditions in regard to service pipes (which are almost 
always of wrought iron) are quite different. In most soils, un- 
less the pipe is thoroughly protected by some applied coating, 
the wrought iron rapidly oxidizes and the pipe steadily deteri- 
orates. Here again, however, we have to take into account 
the methods locally pursued for the maintenance of this 


Business Engineering. 

Lecture Notes. 




part of the plant and the methods pursued in the account- 
ing department. If, year by year, the services are renewed as 
they are found to be defective and if, learning from experience, 
the management makes its renewals with coated pipe instead of 
the ordinary black pipe and the cost therefor is charged up 
as one of the items of the year's expenses, as far as this item is 
concerned the plant may appreciate in value rather than depre- 

Again, certain parts of the plant under investigation might 
be found to need renewal say, on the average, every five years, 
and it might be that some of these parts would need renewal 
one year and some another, so that the cost of renewal would 
be distributed not too unevenly over the five years life period. 
If now these renewals are charged up to the repairs of the year 
in which they are made, they should not be considered in the 
estimate upon which the depreciation life table is made up. 
Here, then, is an item which because of its short life, might 
appear to be a most important element of depreciation but 
which upon further consideration we see is properly disregarded 
because it has already been cared for in repairs or current 

This all goes to show that it is the evidence of ignorance 
or inexperience for anyone to stand off at a distance, without 
examining the plant and system of accounting, and attempt to 
apply some general rules to determine the reduction in plant 
value due to depreciation in a special case. 

The first thing is to have a clear conception of the premises 
upon which our life estimate is based and then to place on record 
all the facts in this connection that we may not later amend our 
figures— perhaps under pressure to make a favorable statement of 
earnings— through misapprehension as to the original basis of our 
estimate. All the records in our books of account should be self- 
explanatory and so sufficient for the guidance of those who are to 
come after us, and especially so in the case under consideration 
where the man who establishes the original basis for the yearly 
charge on account of depreciation is likely to be in his grave 
before the expiration of the life period. 

We will assume that we have a plant which has cost $500,000 
and that we determine that : 

Part "A" will be good for ten years and its 

cost is $25,000 

Part "B" will be good for fifteen years and 

its cost is 50,000 

Part "C" will be good for twenty-five years and 

its cost is 100,000 

Part "D" will be good for thirty-five years and 

its cost is 1 50,000 

Part "E" will be good for fifty years and its 

cost is 175,000 

Total $500,000 

Now, so far, we have been using the trained judgment of the 
practical operator of the plant. Now we have a very different 
proposition. How shall we determine the amount of money to be 
set aside to take care of this depreciation ; in other words, to re- 
new these several parts of the plant as they become useless or 
inefficient ? 

We will assume that we will provide for this case by actually 
taking out of our profits each year a certain amount of cash and 
setting it aside to accumulate at compound interest. 

We will now first have to estimate the rate of interest that 
can safely be reckoned on through a series of years (viz., through 
the life of the plant) and here we require the trained judgment of 
the banker. 

Having assumed a rate of interest, we still have to determine 
the amount which, at this rate of interest, compounded yearly, will 
give us the amount required. It may be the interest could be 
compounded half-yearly, but my assumption makes the proposi- 
tion simpler, while the principle is the same. This is in the line 
of work performed by the insurance actuary, but, of course, there 
is no difficulty in the engineer learning for himself every step of 
the process. 

? 1 

> f 






Business Engineering. 

If we set aside each year for n years a constant number of 
dollars to accumulate at compound interest, we have a geometrical 
progression. Let me remind you that quantities are in geometrical 
progression when they increase or decrease by a constant factor. 

If A is the first term, r the common factor or ratio, n the 
number of terms and S the sum of n terms in the geometrical 
progression, we have 

S — A 

r — 1 

In our problem r, the ratio or factor, is i plus the fraction in- 
dicated by the rate of interest assumed as obtainable throughout 
the life of the plant. Let us assume the rate of 4 per cent., then 
r=i.04; that is, the constant amounts previously set aside will 
each year be multiplied by 1.04. 

In the equation just given, A is spoken of as the first term 
of the geometrical progression; in our case A will be the last 
term, because the last payment of A will not have accumulated 
any interest, whereas the first payment of A which has been ac- 
cumulating 4 per cent, compound interest will have been multi- 
plied at the end of the second year by 1.04, the next year the 
principal A -f the interest will have been multiplied by 1.04 and 
so on to the end of life of plant. That is, each of the constant 
annual payments from earnings will have accumulated at 4 per 
cent, compound interest. Thus at the end of the life of the plant 
we shall have a series of annual payments each with its interest 
accumulation, constituting a geometrical progression which de- 
creases by a constant factor or ratio, which ratio for 4 per cent, 
compound interest will be 1.04. Considering the yearly payments 
(A) separately, the first payment. A, will be made at the end of 
the first year; at the end of the second year this will have in- 
creased by interest to Ar; at the end of the third year to Ar ; at 
the end of the fourth year to Ar', and at the end of the nth year 
(the Hfe of the plant) to Ar»-\ Therefore, the second payment, at 
the end of n years (with one year's interest less) will have in- 
creased to Ar "- '; the third payment to Ar°- "; the third payment 
from the end to Ar' ; the next to the end to Ar ; and the last will be 
A, for it will have had no opportunity to accumulate any interest. 

Lecture Notes. 


Then instead of an increasing geometrical progression, 

A + Ar 4- Ar 2 + Ar^ + + Ar"-8 + Ar°-2 + Ar »-i 

we will have 

Ar-i + Arn-2 + Af»-8+ + Ar3 -f Ar2 + Ar + A. 

This only changes the order of the terms, and in no way modifies 
the calculation. 

In our problem, having the values of S, r and n, we have 
to solve for A, the amount to be set aside each year. 

If for S we use the total value of plant for each class of 
plant, n would be the assumed life for that class. But we can 
make the equation of more general application by solving for 
the per cent, of value of plant required to be set aside, and this 
can be done by taking S as 100 or i instead of the full value of 
the portion of plant under consideration. 

In either case, as I have said, A is our unknown quantity. 

The equation 

gives us 

A(r° — i) 
r — I 


r— I 

r" — I 

With this equation let us determine the amount to be set 
aside each year at 4 per cent, compound interest to redeem the 
value of Part "A" of plant, viz., $25,000, in 10 years. Then 


1.04 — I 



It is not necessary to employ logarithms to obtain the loth 
power of 1.04, as you will probably have at hand Kent's Pocket- 
book, and on page 14 you will find a compound interest table as 
generally to be found in arithmetic textbooks. These tables 
can be used to determine the value of n as they give the results 
from compounding $1 at various rates of interest through a 
series of years, which means that these are tables of powers. For 
instance, at 4 per cent.,the first year shows 1.04 (= i X 1.04); sec- 


Business Engineering. 

ond year, 1.0816 (= 1.04 X 1.04) ; third year, 1. 124864 (= 1.0816 
X 1.04) ; and ten years, 1.480244. Then 

A — 25,000 

1.04 — I 



1.480244 — I 0.480244 

Then to redeem $25,000 at the end of 10 years we must 
invest annually $2,082, if the interest to be obtained is 4 per 
cent, compounded annually. 

But our determination will be capable of more general 
application if we take S as i or 100 and so determine how much 
we must set aside each year at 4 per cent, compound interest 
to redeem $1 or $100. In the first of these two cases our answer 
will be a fraction which, multiplied into the amount to be 
redeemed, will give the amount to be set aside each year. In 
the second case, we get as an answer the per cent, of the amount 
to be redeemed to be set aside each year which, multiplied into 
this amount to be redeemed, and divided by 100, gives the annual 

To make sure that the use of the equation given is thor- 
oughly understood and for reasons to follow, let us solve for A, 
using I for the value of S and then using 100. 

A — s 

r— I 

r" — I 

— I 


— -04 


1.0410 — 1 .480244 

25,000 X .08329 = $2,082, the amount to be set aside each 
year as previously determined in solving direct for the $25,000, 
the total amount to be redeemed 


r—i 1.04 — I 

A — S 

r" — I 





or 8.329 per cent, of the amount to be redeemed. 

(25,000 X 8.329) ^ 100 = $2,082, as before determined. 

An additional reason for my taking the trouble to carry out 
in detail the several ways of using our equation to solve the 
problem in hand is because I have frequently noticed the troubles 
occasioned by lack of uniformity in the methods followed to 
indicate per cent. A not uncommon error, even among book- 

Lecture Notes. 


keepers, is the filling in of the items in a column calling for 
rates per cent, with fractions, when a fraction is not called for. 
For mstance, a column will perhaps be headed "Per cent." and 
in that column may appear an item .02, which is intended to 
mean 2 %, but which, in view of the heading really means two- 
hundredths of one per cent. Those who know better when they 
stop long enough to think forget that "two per hundred" can be 

2 per cent. (- 2%), or .02, or-^. but not as .02 per cent. or-± per cent. 

But particularly I have gone into this detail because I now 
wish to refer you to certain tables which can be used directly 
for the several values of A. I wish you to understand how these 
tables are derived and I also wish you to understand why the 
two tables to which I shall specifically refer can be both used 
to obtain the same result, except for some few minor inac- 
curacies in one of them. 

In Kent's Handbook, page 16, you will find a table showing 
the annuity required to redeem $1,000 for one, two, three, four, 
&c. and certain other years up to 100, at several rates of interest 
compounded annually. In using this table we find the figure wJ 
are looking for at the intersection of the vertical column which 
indicates the rate of interest and the horizontal column which 
indicates the life of the part of plant we are considering. When 
this figure is found, it is for the amount required each year in- 
vested at 4 per cent, compound interest to redeem $1,000 so if 
we prefer to state the result in per cent., we move the decimal 
point one place to the left. 

In Matheson's "Depreciation of Factories" (second edition) 
we find on pages 67 and 68, "Table 3; Sinking Fund; Annual In- 
vestment to Produce One Pound in a Term of Years." 

Notice how self-explanatory is this title. 

This is a more extended form of the same table as given in 
Kent, except that it is calculated for the redemption of £1 instead 
of $1,000. In Matheson's table the results are stated as fractions 
and therefore can be used direct as multipliers. The results are 

■f 1 


Business Engineering. 

stated as fractions indicating per cent, without the use of the 
words per cent, or the sign %. 

At my request, the calculations in these tables were checked 
by a member of the Class of 1904 and he found that Kent's table 
is correct and Matheson's correct except in the two following 
cases : 

Vertical column 3 %, horizontal column 3 years, Matheson 
gives .3225 ; this should be .3236. 

Vertical column 4 %, and horizontal column 15 years, Mathe- 
son gives .0492; this should be .04994. 

Let us now calculate out our plant life table, using both the 
Kent and Matheson tables. 












Est - 















Table or 
Taken Di- 
rect From 




Amount to 

Be Set 
Aside Each 
Year to 
Cover De- 
tion) of 
Each Part 
of Plant. 

















It should be quite unnecessary to point out that the amount 
in column 8 can be obtained by multiplying the number of thou- 
sands as shown in column 3 by the figure shown in column 4; 
or by multiplying the full amount shown in column 3 by the 
figures shown in both columns 5 and 6; or by multiplying the 
number of hundreds as shown in column 3 by the figure shown 
in column 7. 

If we have not the Kent, or Matheson or equivalent table 

Lecture Notes. 


by us, then each of the amounts in column 8 can be calculated 

r°— I 

In this case tables of logarithms would be required, or the 
powers of 1.04 would have to be calculated. 

Suppose we prefer the result in the form shown in column 7 ; 
namely, per cent. 

For A we have, as before shown, A — 100 -ii^i-llJ 

1.0410 _ 

For B we have, as before shown, A — 100 ^•^^~ 

For C we have, as before shown, A — 100 'l^^^" 
For D we have, as before shown, A 


1.0425 _ 
1.04 — 



— 8.329. 

_ 4' 


— 4- 
1.6658 " 

_ 4. 

I 2.9460 

= 4.994. 


For B we have, as before shown, A — 100 ^-^^ — ^ . 4^ ^ ^.. 

1.0450 _ I 61064 ^ ^' 

agreeing with the figures as obtained from the Kent and Mathe- 
son tables. 

It is well to here draw attention to a mistake which is some- 
times made in estimating the average life of a plant. Take the 
case we have already considered and the calculation might be 
as follows : 




Value of 
Parts in 











17,500,000 ^ 500,000 = 35 years average life. 

But if the average life of the plant were as long as 35 
years, we find by referring to the Kent or Matheson tables that it 
would require only 1.358% of the total value of the plant (viz., 



Business Engineering. 

$6,790), set aside each year at 4 %, compound interest, to rebuild 
the plant at the end of its life. 

But taking each part in detail we have found that to renew 
each part as its life expires will require an annual payment to the 
sinking fund of $10,163.50, which is 10,163.50^500,000 
= 2.03 % of the total value of the plant. 

By referring to Matheson's Sinking Fund table already re- 
ferred to we find that 2.03 is almost exactly the per cent, required 
to redeem the cost of the plant in twenty-eight years. 

So we see the "average life" method of calculation is abso- 
lutely misleading. 

To emphasize this point, let us make some calculations to 
learn the result of assuming an average life of 35 years and so 
setting aside each year only $6,790,= 1.358% of total value of 
plant, instead of $10,163.50, = 2.03 7c of total value of plant. 

At the end of the first ten years we will have accumulated 

S — A 

r» — I 




1.04 — I 




Withdrawing $25,000 required to renew Part "A," we have left 
81,513-95 — 25,000 = 56,513.95, say $56,514. This will accumu- 
late by the end of the next 5 years (15 years in all), when Part 
'*B" has to be provided for, 56,514 X 1.2166 (=$1. compounded 
5 years at 4 %) =$68,755, and the additional yearly payments 
to sinking fund will accumulate to 



1.04 — I 


1. 2166 — I 
1.04 — I 


The total accumulations will be 68,755 + 36,768 = $105,523. 
Withdrawing the $50,000 required to renew Part "B," we have 
a balance left, 105,523 — 50,000 = $55,523. 

At the end of the next 5 years (20 years in all) we have to 
provide for a second renewal of Part "A." 

During this time the balance of $55,523 will accumulate to 
(55,523 X 1.2166=) $67,549; and during this time the additional 
annual payments will accumulate to $36,768, as before calculated. 
The total accumulations will be 67,549 + 36,768 = $104,317. 

Lecture Notes. 


Withdrawing the $25,000 to again renew Part "A," we have 
a balance left 104,317 — 25,000 = $79,317. 

At the end of the next 5 years (25 years in all) we have to 
provide for the renewal of Part "C"— $100,000. 

During this time the $79,317 will accumulate to (79,317 X 
1.2166=) $96,497; and during this time the additional annual 
payments will accumulate to $36,768, as before calculated. The 
total accumulations will be 96,497 + 36,768 = $133,265. 

Withdrawing the $100,000 to renew Part "C," we have a 
balance left of $33,265. 

At the end of the next 5 years (30 years in all) we have to 
renew Part "A" for the third time, $25,000, and Part "B" for the 
second time, $50,000, making $75,000 in all. 

During this time the balance of $33,265 will accumulate to 
(33,265 X 1.2166=) $40,470; and the additional annual payments 
will amount to $36,768, making the total accumulations $77,238. 

Withdrawing $75,000 for renewing Part "A" for the third 
time and Part ''B" for the second time, we have a balance left 
of only (77,238 — 75,000 = ) $2,2sS. 

At the end of the next 5 years (35 years in all) we have tc 
renew Part "D" for the first time, requiring $150,000; and dur- 
ing this time the balance amounting to $2,238 will accumulate to 
(2,238 X 1.2166=) $2,722. 

Adding the accumulations of the annual payments for 5 
years, $36,768, we have a total accumulation of (2,722 -f- 36 378 =) 

So after renewing Part ''D," $150,000, we are in debt (icjo- 
000 — 39,490=) $110,510. 

Thus at the end of the 35 years, which was assumed as 
the average life of plant, we are in debt for depreciation renew- 
als $110,510, and falling behind all the time, as will be seen. 

At the end of the next 5 years (40 years in all) we have 
to renew Part "A" for the fourth time, requiring $25,000. 

The debt of $110,510 will during this time increase to 
(110,510 X 1.2166=) $134,446. The total to be provided for is, 







Business Engineering. 

therefore, (134,446 + 25,000 =) $159,446. Against this we have 
only the yearly accumulations, amounting to $36,768. So now 
our debt is increased to (159,446 — 36,768=) $122,678. 

At the end of the next 5 years (45 years in all) Part "B" 
has to be renewed for the third time, requiring $50,000. 

By this time our debt will be increased to (122,678 
X 1.2166=) $149,250. The total to be provided for is, therefore 
(149,250 + 50,000=) $199,250. Against this we have only the 
yearly accumulations, amounting to $36,768. So now our debt is 
increased to (i 99,250 — 36,768=) $162,482. 

At the end of the next 5 years (50 years in all) we have to 
provide for the fifth renewal of Part "A," ($25,000), the second 
renewal of Part "C" ($100,000), and the first renewal of Part **E" 
($175,000) ; $300,000 in all. 

The debt of $162,482 during this time increases to (162,482 
X 1.2166=) $197,675. The total to be provided is, therefore, 
(300,000 + 197,675 =) $497,675. Against this we have only $36,- 
768, the yearly accumulations for the five years ; which, deducted, 
leaves a debt of $460,907. 

Thus it is seen that by the "average life" scheme which 
we have just tested, at the end of 50 years, in spite of having 
laid aside $6,790 each year at 4% compound interest, we are 
actually in debt for renewals we have been obliged to make to the 
extent of $460,907, the original value of plant being only 

It is well here to bear in mind to avoid possible confusion 
of thought that this demonstration does not depend in principle 
upon the actual assumptions in the life table, as the same life 
periods have been assumed in each case. 

In the scheme which I have suggested, requiring in this 
case an annual payment to Depreciation Sinking Fund of $10,- 
163, each part is treated separately and, at the end of the life 
of each part, a sufficient amount has accumulated for renewal 
and again this part of annual payment to Sinking Fund goes 
on accumulating to pay for the next renewal of the part con- 

Lecture Notes. 


While, for convenience of statement and to facilitate con- 
venient comparison with other cases of depreciation cost, we may 
calculate out the average per cent, of total value of plant to be 
laid aside each year,— finding it in this case 2.03 %— still we 
must not forget that this total is made up of absolutely dis- 
tinct annual redemption payments, each to take care of its own 
parts of the plant and to renew those parts as often as they 
wear out. 

As the subject of depreciation is of commanding importance, 
and as the results obtained from the two systems of estimating 
which I have shown, diflFer so widely, and as it is difficult to 
understand why the difference at the end of 50 years should 
amount to almost the original total value of plant, I shall make 
a further analysis of the results from these two systems. 

If $6,790 (the amount called for by "average life" system) 
were paid into Sinking Fund each year and accumulated undis- 
turbed for 50 years, at 4 % compound interest, the total value of 
Sinking Fund would then be: 

Q A ^" —I iT, 1.0450— I 7.1064— I 

S =. A « 6790 -^^ - 6790 ^— _i-_- _ 11,036,561. 

r — I 

1.04 — I 

1.04 — I 

If $10,163 (the amount called for by separate Hfe system) 
were treated in the same way, at the end of fifty years the total 
would be: 

o ,7. 1064 — I . 

S - 10,163 ^^2-1 '^ ^^'551,485. 

But, by the life table assumed in both cases, we see that there 
would be certain withdrawals from each of these sinking funds. 
In the following table I show these withdrawals and I also show 
the number of years in each case remaining before the expiration 
of the 50 years, during which the amounts so withdrawn would 
have gone on accumulating at 4 % compound interest if they had 


Business Engineering. 

been left undisturbed, and the total accumulation thereby in each 







At End 



to be 




Part of 
60 Year 

Value of $1. 
Compounded at 

4 o^ for 
Years Given. 

Amounts Ac- 
cumulated at 

End of 50 
Years. Prin- 
cipal and 
Col. 3 X Col. 5. 




















A, C&E 






1.04*° = 4.8009 
1.04" - 3.9460 
l.M" - 3.2434 
1.04" = 2.6658 
1.04" - 2.1911 
1.04»» - 1.8009 
1.04»« - 1.4802 
1.04* = 1.2166 
1.04» -1. 












Referring to the "separate life" system, we have seen that if 
$10,163 were paid into Sinking Fund yearly and not disturbed 
the total accumulations would amount to $1,551,485 

If now we deduct the amounts withdrawn with 
accumulated interest as shown in last table 1,497,290 

we find we should have in the Sinking Fund at the 

end of the 50 years, $54,195 

If our calculations are correct, this should equal the accrued 
liability for depreciation at the end of the 50 years. Classes A, 
C and E were renewed at the end of the 50 years, so we have 
to consider only Classes B and D. 

B was renewed for the third time at 45 years, and so there 
has accrued a 5-years* liability on that part of plant. 

D was renewed for the first time at 35 years, and so there 
has accrued a 15-y ears' liability on that part of plant. 

Lecture Notes. 123 

By the original life table it was shown that Part B required an 
annual payment to Sinking Fund of $2,497, and Part D, $2,037. 

Then there should remain in the Sinking Fund at the end of 
50 years, after paying for all renewals up to and including that 

w Q o^«^^-°4^~i 1.2166— I 

^~ ^ " '497 -y:^j— ^ = 2497 ^^^_^ - I13.521 

n G o«,^ ^•°4^^ — I 1.8009— I 

^~ ^ =" '°57 -j;^^^ = 2037 --^;-:3-x » 40.791 


which practically agrees with the amount remaining in the Sink- 
ing Fund after all the withdrawals for renewals just shown, 
amounting to $54,i95- The difference is accounted for by the 
fractional multipliers not being carried out far enough. 

Coming now to the "average life" figures, we have seen that 
the total in Sinking Fund at the end of 50 years, if the fund 
had been undisturbed, would have been $1,036,561. 

But by the table of withdrawals we found that these amounts 
with interest were $1,497,290. 

This shows a deficit of $460,729, 

which is in practical agreement with the amount of shortage first 
shown by detailed analysis, which was $460,907. 

If to the deficit just shown we add the accrued liability as 
just shown in the case of the ''separate life" scheme, we have a 
total deficit of (460,729 + 54,312) $515,041. 

If our calculations have been correct, this should be equal 
to the difference between the totals of the undisturbed accumula- 
tions under the two systems : 

Separate life system, $1,551,485 

Average life system, 1,036,561 

Difference— being total deficit by average life plan,. . . $514,924, 
which is in practical agreement with the total deficit just shown. 
From what has been shown about providing for depreciation it 
can be seen how a sinking fund could be established to extinguish 
a debt — say to liquidate a bonded indebtedness — in a given num- 



Business Engineering, 

ber of years. Such an arrangement is not infrequently a feature 
of the trust agreement under which bonds are issued. The ex- 
tinction or reduction of a debt under such a sinking fund scheme 
is known as amortization, a term more frequently heard in Great 
Britain than here. 

I have followed through these two schemes for calculating 
a depreciation sinking fund because I have found that too often 
there is a lack of definite opinions on this subject among those 
charged with responsiblity in connection therewith; and that, 
further, where definite opinions are held they are not infrequently 
based upon an insufficient knowledge of the elements entering 
into the problem. 

I have thought also, that for young men who may be placed 
in positions where questions as to the relative merits of invest- 
ments may come up for solution, before they have had the oppor- 
tunity to learn in the school of experience, it might be of some 
advantage to give them a concrete example of the results to be 
obtained from the straight investment of money at compound 
interest, even at as conservative a rate as that of 4 per cent. This 
lesson may even be of value to those who have had actual experi- 
ence in the field of business, and especially with **quick rich" 
schemes of varying degrees of contained fallacy. 

Some of you will no doubt be called in to examine the scien- 
tific and technical details of marvelous inventions which form the 
basis for some of these "quick rich" schemes. 

Unless guarded against, the inclination too often exhibited is 
to remember the few instances of such schemes which have quick- 
ly brought large pecuniary returns, and to forget the hundreds 
and thousands of cases where there has been either no pecuniary 
return, or only a moderate return as the result of long-continued 
and costly efforts to develop into practical and commercial suc- 
cess some hidden element of intrinsic merit. 

In such cases which come up for decision, it is well to keep 
always in mind two things : 

I. You cannot get out of anything more than it contains; 
in spite of any invention, the conservation of energy principle will 
be maintained. 

Lecture Notes. 


2. The pecuniary returns to be obtained from a business not 
yet established must compete with the returns to be obtained by 
safely investing at compound interest :— that is, leaving the inter- 
est as well as the principal to accumulate interest. 

In connection with the second point we may well recollect 
that the majority of fortunes have been built up by frugality and 
the incessant operation of the accumulative process of compound 

Those of us who have invested moderate amounts from time 
to time even in schemes which had intrinsic merit but which 
were as yet undeveloped and therefore obliged to pass through 
a period of no-dividends, are surprised to find that by safely in- 
vesting these amounts at a moderate rate of interest and allowing 
them to compound, we would have greatly bettered our fortunes 
and saved ourselves from much needless worry. 

If we have a business which as a resuh of our particular 
skill and ability as specialists is bringing us in a good return and 
leaving us a surplus after meeting personal expenses, we will do 
well to invest that surplus safely and allow compound interest to 
do the rest. 

Above all things, we should avoid being led astray by the 
opinion that because we have succeeded in the line of work for 
which we have through years of work in the college and school of 
experience trained ourselves to be competent, we are also neces- 
sarily competent in other lines, which up to that time we have 
never followed. 

Many a fortune that has been gained through years devoted 
to experience-getting in one special line of endeavor has been 
lost because the winner of that fortune did not correctly determine 
by analysis the elements entering into the cause of that success. 

And the most dangerous "flyer" which can be taken is the 
purchase of stocks on a "margin." 

In buying on a "margin" you buy perhaps ten times as much 
stock as you have money to pay for, the balance of the purchase 
price being borrowed on the security of the stock purchased. 
Your broker kindly arranges the loan so as to facilitate your 
entering into business relations with him. The market price of 


Business Engineering. 

your purchased stock goes down and more margin is required of 
you by your broker — that is, you must put up more money or 
have your stock sold out. The fall in price may be temporary, 
but unless you have the additional margin of cash you lose that 
already put up. Whereas, had you purchased outright, — pur- 
chased only such an amount as you could pay for in full, — the 
temporary fluctuations in price would not have imperiled your 
investment. If the stock represented a property of intrinsic merit 
at a fair valuation, you would only have had to hold your securi- 
ties until "better times" returned. 

We have just gone through a period where many fortunes 
were wiped out because of extensive purchases "on margin"; 
whereas, many other fortunes, which were tremendously cut down 
"on paper," have been restored wholly or in great part because 
the depreciated securities were held by men who had money 
enough to protect them until prices were restored to the normal. 

I have been asked a number of times in class to draw the 
distinction between stock gambling and the buying of stocks 
for investment. 

While every business venture must contain more or less 
of the element of speculation, stock-gambling is nothing but 

If we buy merchandise with the purpose of reselling if 
possible at a profit, we cannot avoid the element of speculation, 
because the merchandise may increase or decrease in value while 
in our hands. In the same way, if we purchase stocks or bonds 
for investment, the element of speculation is necessarily involved. 
In purchasing for investment, eliminating as far as possible the 
element of speculation, we buy only what zve can pay for. 

In stock-gambling, the purchase is made by putting up a 
"margin" of say lo per cent, of the market value of the stock 
purchased. That is, perhaps ten times as much stock is pur- 
chased as the purchaser has money to pay for, the balance being 
borrowed on the securities purchased. 

Evidently then, the venture is based upon the ability of the 
purchaser to correctly estimate the chances of the market price 
of the security rising and falling, and in the case of the ordinary 

Lecture Notes. 


victim, the purchaser has no control over the possible fluctua- 
tions in price. The purchaser, then, gambles on chances over 
which he has no control, and as he is involved to perhaps ten 
times the amount of the money he has put up as margin, which 
may be all that he owns, he is taking a risk with his savings which 
no man has a right to take who has others dependent on him 
for support. 

In every panic in the stock market competencies and for- 
tunes are wiped out because those involved cannot protect their 
stock transactions. 

On the other hand, book losses which come to bona fide 
investors are frequently made good wholly or in part by the 
natural increase in prices which always follows a panic. The 
investor who is only interested in the market through securities 
which he owns outright can, if he has the courage, wait for the 
recovery which he can feel sure will follow. 

It needs no argument to show that the selling of securities 
which one does not own— selling short— is nothing else but 
gambling. It is a game of chance. 

Replying to another question— of course, stock exchanges 
are not only useful institutions, but they are a business neces- 
sity. Without the broad markets created by the facilities 
afforded by the stock exchange, securities would necessarily 
have to be sold at a sacrifice when it became necessary to 
promptly turn investments into ready cash, and financial opera- 
tions would be limited in countless ways. 

But because the stock exchange is a necessity in connection 
with legitimate banking does not prove that all, or even a ma- 
jority, of stock exchange transactions are legitimate. 

I think, then, that I am warranted in saying that if we 
buy securities and pay for them in full we are making a legiti- 
mate investment, and if we make ourselves liable for more 
than we can pay for, we are gambling. 

This may all seem apart from the question of "depreciation," 
but the opportunity was afforded me through the illustrations 
of the workings of compound interest to utter a word of warn- 
ing (particularly needed, I think, by the technical man), and as 

f ■-! 


It ! 




Business Engineering. 

I am trying to give you a general view of business conditions 
and methods, I have not hesitated to step for a moment into this 
side path. 

Coming back to the subject of depreciation or deterioration 
of plant, let me say that the scheme I have advocated and shown 
in considerable detail, is not one which, as far as I know, is 
generally followed; certainly not in the United States. 

It is much more general in Europe to set up a sinking fund 
to cover depreciation and also fluctuations in rates of profits so 
that the dividends may be maintained at a uniform rate, or at 
least to insure their not being reduced. 

It is not only of importance that the stockholders in a com- 
pany should be able to calculate in advance on the amount of 
income they are to receive from their investment, but it is im- 
portant that the stock representing the principal shall not be 
allowed to unnecessarily fluctuate in selling-price. At any time 
some emergency may arise necessitating the sale of the stock. 
If the rate of dividend is allowed to fluctuate, the selling-price 
of the stock will be unfavorably affected. 

I do not mean to say that in the United States the loss due 
to depreciation is neglected, but not infrequently this loss is 
not accurately measured and so it cannot be known whether the 
correct amount has been withdrawn from the year's profits to 
meet this item of loss. Necessarily, it is a problem which cannot 
be solved with mathematical accuracy. Necessarily, the exer- 
cise of judgment is involved; hence, if we are to be on safe 
ground we must depend upon a specifically trained judgment. 
But in any case we finally have to depend upon an estimate and 
this means that year by year as we gain further experience in 
the particular problem to be solved we should revise our scheme 
at every point where we find our estimate is not confirmed by 
accomplished fact. 

In many cases, depreciation is more or less covered by the 
money taken from profits and reinvested in betterments and 
extensions of plant. 

Sometimes this is done without any special effort being 
made to estimate the actual depreciation. 

Lecture Notes. 


In such cases, the process is certainly a hap-hazard one. 

Unless we follow systematically some method for estimating 
the cost of depreciation, we cannot be sure that our capital is not 
being impaired. 

1 am chiefly concerned, then, that you shall understand the 
necessity for this appraisal of cost of depreciation in advance, and 
so be prepared to take measures to pay fully for it out of earnings. 

Frequently in the United States, the amounts withdrawn from 
profits to cover depreciation are advisedly reinvested in exten- 
sions and betterments to the plant under process of depreciation. 
Then we are warranted in including in our life table such a rate 
of interest as we feel positive that these betterments and exten- 
sions of plant will earn for themsehes. 

If the yearly return or rate of interest (r) is thus increased, 
the amount to be set aside each year (A) will be decreased. This 
scheme would necessitate the isolating of this portion of the 
yearly profits and reinvesting them in further extensions of plant. 
Thus we should have to provide for the investment in plant 
extensions of the several yearly depreciation payments plus the 
compound earnings from these extension investments. The result 
would be complicated and cumbersome, becoming more and more 
so each year. 

The simpler and more usual arrangement is to allow the 
earnings from these extensions of plant to be merged with the 
other earnings. In this case, we must invest each year in plant 
extensions such an amount as, without assistance from interest 
accumulations, (or separate earnings from these plant extensions) 
will pay for the several parts of original plant in accordance with 
the life table: For instance, for a ten years life, it would require 
one-tenth of the cost ; for a fifteen years life, one-fifteenth of the 
cost, and so on. 

While this will require a larger yearly payment (A) to meet 
depreciation, the earnings from the additions to the plant (r), 
which will be merged with the other earnings will off-set this in- 
crease, provided that these earnings from extensions of plant do 
net decrease the average per cent, of earnings. 

In any case, we must also provide for the depreciation of 

■ s 


ft i 





Business Engineering. 

these plant additions. This portion of the subject I shall refer 
to again in connection with the problems in accounting to be con- 
sidered in connection with depreciation. 

When the amount deducted from profits to cover depre- 
ciation is invested in additions to plant, the record in the books of 
account must be so kept that no warrant shall be furnished by 
such record for the issue of additional capital stock, on the plea 
that this investment represents surplus profits. It must never be 
forgotten that there are no surplus profits until depreciation is 
paid for out of earnings. 

As these additions to plant are only intended to compensate 
for the depreciation in the value of the original plant, such addi- 
tional issues would finally mean the duplication of capital stock on 
the one capital investment. 

There is here a distinct danger which has already mani- 
fested itself in the field of United States finance, and especially 
in reorganization and consolidation schemes of ownership. An 
analysis of the accounts shows, or appears to show, that the 
properties of the concern are worth more than the face value 
of the issued securities — bonds and stock. 

So far as securities are issued against extensions to plant 
paid for from that part of the earnings which were set aside, or 
should have been set aside, to compensate for depreciation, so 
far is it a "watered" issue. 

On the other hand, there are cases where the extensions to 
plant paid for from profits far exceed the cost of depreciation 
or original plant, and so furnish a legitimate warrant for the 
issue of additional securities. 

Sometimes the increased value of real estate will com- 
pensate for the decreasing value of plant due to depreciation, 
but it must be manifest that an assumption to this effect cannot 
be safely made in advance. 

If after the event we find such to be the case, so much the 
l)etter for us and we are that much ahead. This is one of 
the elements of speculation that, deplore it as we may, enter into 
every line of business. 

Lecture Notes. 


Also, the value of the business as a "going concern," — 
franchise rights, good-will, &c. — may so appreciate as to com- 
pensate for depreciation of plant and possibly far more. 

But again, I say we cannot safely make such an assump- 
tion in advance. 

In taking over a property, or group of properties, the ques- 
tion of past depreciation is taken care of in the purchase price. 
The plant may be greatly in need of repair and extension. Then 
the cost of repairs, renewals, extensions and improvements 
should be most carefully estimated and considered as a part of 
the purchase price. To carry on the business economically after 
we assume control, we must put the plant in condition for 
efficient operation. Having carefully estimated the cost of these 
improvements and added the amount to the purchase price, we 
must determine if we are warranted in paying the total cost so 
arrived at. 

But it is here to be most carefully borne in mind that if we 
include the rehabilitation of plant as part of original cost and 
therefore cover this item by capital obligation, we must at once 
set up a scheme to pay for the depreciation or deterioration of 
the rehabilitated plant which will commence as soon as it is put 
into operation. It may be claimed that this depreciation does 
not commence at once, that the plant will improve in efficiency 
for a certain length of time depending upon how long it takes 
to ''find itself." If this is to be considered, then introduce it 
as an element in setting up your life table; but do not delay in 
starting your depreciation sinking fund scheme. As in many 
other places, there is here danger in delay. 

It is possible that the results obtained from the business in 
the past would show but a small rate of profit on the enlarged 
capital. Here we are warranted in giving some weight to a 
conservative estimate of the increase in profits to be derived 
from improved plant and improved business management. 

It can readily be seen that this last may become a very dan- 
gerous element in the financing of schemes of reorganization 
and consolidation. The investing public and sometimes the 
bankers themselves are dependent upon the estimates of cost of 


Business Engineering. 

improvements and of increase in earnings furnished by the ex- 
perts employed. 

The subject is too large a one to be covered in this brief 
course on the business side of engineering, but I have said 
enough to show that the technical expert to be safely relied 
upon, first by the banker and then, through the banker, by the 
mvesting public, must be thoroughly competent, technically and 

But this is not enough — he must be honest and have the 
courage of his convictions. He must be strong enough to say 
"no" in the face of great temptation. 

We have had many a case of stocks representing these 
consolidation schemes declining in price almost at once after the 
investing public have absorbed them (sometimes before the 
absorptive or digestive process has been completed) through the 
over-estimating of the value of the business and the under- 
estimating of the cost of rehabilitation of plant. 

See to it that none of you, either through ignorance or 
design, are ever responsible for so robbing the public. 

Here there is resting upon you a professional responsibility 
as great as that resting upon the doctor and the lawyer, for 
remember that there are many ills worse than death that may 
follow in the train of wrecked fortunes. 


May, 1904. 

Referring to Question 4— (6) and (c)— Paper of May 6, 1904. 

I have been asked— Why should Depreciation be charged 
(= debited) to ''Loss and Gain Account" (= Profit and Loss) 
and credited to Depreciation Sinking Fund Account {= Final Re- 
newal Fund)? 

In charging estimated depreciation of plant to Loss and 
Gain and crediting the same to Depreciation Sinking Fund, we 
really skip or lose sight of a number of intermediate steps. 

First, think of "depreciation" as deferred repairs or deferred 
renewals— or better, perhaps, as final repairs or final renewals. 
We cannot pay for depreciation at once, as we do in the case 
of repairs, because the plant is not yet to be abandoned; it is 
not yet worn out; but we know it will wear out in time and 
so we must provide for its renewal at the expiration of its life, 
and this can only be done by taking out of our profits, year by 
year, such an amount as will, accumulating at compound interest 
(the rate of interest to be determined by the exercise of banking 
judgment), rebuild or renew the plant when it does finally have 
to be abandoned. (In fact the plant will never have to be aban- 
doned as a zvhole and rebuilt as a wlwle, but what is true of the 
parts is true of the whole and for simplicity we will speak of 
the whole.) 

It is thus seen that the money to pay for repairs or current 
renewals, must be taken out of income and so must the money 
for final renewals, that is, depreciation. This money must come 
out of income and be a charge ahead of profits or else it must 
come out of capital. It can be at once seen that if it were 
taken out of capital, and all the apparent profits paid out in 
dividends, the capital would, year by year, be impaired to the 




Business Engineering. 

extent of the amounts paid out of Cash for current renewals 
(repairs) and the accrued liability for depreciation of plant. 

Hence the cost of repairs (which I shall hereafter call 
current renewals) and the value of depreciation (which I shall 
hereafter call final renewals) must be included each year in the 
statement of the year's operating cost — that is, they must appear 
as debits or charges against the account Loss and Gain also 
known as Profit and Loss. I shall hereafter use the title ''Loss 
and Gain" because it is somewhat more logical; the losses or 
debits appear on the left of the account and the gains or profits 
appear on the right side of account and so correspond with the 
order in the title. In the title Profit and Loss, this order is 
reversed, the word "profit" on the debit side and the word *1oss" 
on the credit. 

Bear in mind that ''Loss and Gain" is an account in which 
the several accounts showing losses and gains are summarized, 
so that they can be balanced against each other and the final 
result of the year's business (loss or gain) determined by the 
debit or credit balance of the account. 

Suppose we have an account called "Coal Account." If 
we buy coal the cost is charged (debited) to that account and 
at the end of the year the debit balance of that account, after 
taking account of stock of coal on hand, will be carried into 
Loss and Gain as one of the items of the year's operating cost. 
It will be on the Dr. or loss side. But if we transfer the charge 
for coal from Coal Account to Loss and Gain Account, we 
cannot leave the debit balance against Coal Account also open 
on the Ledger; if we did so, we should have two charges open 
on our books for the same item. So in transferring the charge 
to Loss and Gain, we credit a like amount to Coal Account to 
close or balance that account, and now we have the item for the 
cost of the year's consumption of coal appearing as one of the 
debit items of Loss and Gain; that is, one of the losses. The 
charge against Coal has not been wiped out but it has been 
transferred from the separate coal account to the general ac- 
count called Loss and Gain as one of its debit items. So, if 
we skip the intermediate steps, when we pay cash for coal, we 

Lecture Notes. 


credit "Cash Account" because it paid out the money for the coal 
and we debit Loss and Gain because the money paid out for coal 
is one of the items of the year's expense or loss. 

What is true of coal is true of all the other operating 
expenses of the business, including manufacturing material, 
wages, rent, salaries, stationery, stamps, sales commissions, etc., 
etc. ; and, of course, current renewals of plant and final renewals. 
That is, the losses of the year certainly must include the wear 
and tear on the plant. 

If a belt breaks, or an armature burns out or a shutter 
blows oflf the building and breaks, these parts will be renewed 
and paid for out of Cash. Then Cash will be credited and the 
proper repair account will be charged or debited with the 
amount paid out on its behalf. I say the "proper" repair ac- 
count, because for greater faciHty of analysis we should probably 
have more than the one repair account; for instance, "Steam 
Plant Repairs," "Electric Machinery Repairs," "Building Re- 
pairs," etc. But for greater simplicity in our present discussion 
let us assume that we have only the one "Repairs Account" to 
cover current renewals. At the end of the year there will be a 
debit balance against "Repairs Account" equal to the sum of all 
the current renewal items, unless this is reduced by some credit 
items for material or scrap recovered. 

In closing the books the total cost of current renewals will 
have to be carried into Loss and Gain Account as already ex- 
plained, and that we may not have a duplication of charges, we 
must credit "Repairs Account" with the amount transferred to the 
debit side of Loss and Gain, all as in the case of Coal. Repairs- 
will now appear as one item of loss in "Loss and Gain Account'^ 
and therefore must not also appear in the separate account of 
"Repairs Account." 

Now with Final Renewals (= Depreciation) we must get the 
estimated cost for the year into the account which summarizes 
the losses and gains for the year, namely, "Loss and Gain Ac- 

But this case is different from current renewals because we 
have no payment to make at once ; we are only laying aside from 

t i 




P ■ 


Biisuicss Engineering. 

our income an amount which we believe will be later required to 
make good the accrued and constantly accruing liability for that 
part of the wear and tear on our plant which is not made good 
by current renewals paid for out of Cash. 

In the case of current renewals we had a debit and a credit 
because we charged ^Repairs Account" for the work done and 
we credited "Cash Account" for the money supplied. 

In the case of final renewals we might decide to charge to 
some intermediate account before charging to "Loss and Gain " 
the same as we first charged current renewals to "Repairs Ac- 
count" and later transferred the several items of the Repairs 
Account m bulk to Loss and Gain. Suppose, then, we first charge 
final renewals to Depreciation Account. (It will be seen that 
there is not the same reason for first passing into an intermediate 
account as in the case of repairs, because, unlike current renewals 
there is only one charge for depreciation to make for each closing 
of the books and therefore we would only pass the item into 
Depreciation Account and immediately transfer it by cross entry 
to Loss and Gain Account, whereas, with current renewals we 
employ the intermediate "Repairs Account" in which to group or 
classify the many items occurring through the year. But we will 
now use Depreciation Account to better explain all the steps.) 

There is one point not covered. When we charged current 
renewals to Repairs Account we were able, as I have already 
shown, to make the entry complete by crediting Cash Account 
with the money paid out. We must then find a credit entry to 
balance our charge to "Depreciation Account," or we should have 
a debit without a corresponding credit. There was no payment 
from Cash so we cannot credit that account. As there is no 
actual transfer of cash, Cash Account is not involved. The entry 
is made to record the charge against the year's profit to meet an 
accrued liability and to show that this amount has been taken out 
of income and cannot be employed to swell profits or surplus. 
We want to show that this amount is set aside for a specific pur- 
pose, to redeem a loss later to be in evidence. Therefore, in 
charging to Depreciation (later transferred as a debit or charge 
to Loss and Gain) we credit the amount to "Depreciation Sinking 

Lecture Notes. 


Fund Account," or "Depreciation Redemption" or "Final Re- 
newal Fund," or any other title which will properly express our 

You may say, if we give the amount to "Final Renewal 
Fund," why should we credit that account ? But we do not give 
the money to that account. Cash Account still has control of it 
and may now be said to have received it from "Final Renewal 
Fund." Originally Cash Account received the money from some 
of our sources of income and credit was given at the time to the 
proper income accounts and debit was made to Cash. The con- 
dition has not changed with regard to Cash Account ; it had the 
money in hand before the entry was made "Depreciation Account 
Dr. to Final Renewal Fund" and the making of that entry has 
not changed the responsibility of Cash except that it is now re- 
sponsible to ''Final Renewal Fund'' for this amount instead of 
being responsible to some other account or accounts as before. 

Let us go a step further, and suppose we decide to place the 
Final Renewal Fund in the hands of some Trust Company as 
Trustee, the Trust Company agreeing to pay say 3 per cent, 
compound interest, on the deposit. Then when we turn the fund 
over to the Trust Company we should charge the Trust Company 
and credit Cash ; but the amount would still remain to the credit 
of "Final Renewal Fund" as it should. 

Now consider this for a moment with regard to a statement 
of assets and liabilities. In such a statement the assets are found 
on the debit (left) side of the Ledger and the liabilities on the 
credit (right) side. For instance, if we pay out money for plant, 
or stock, or real estate, we charge those accounts and the amounts 
so charged appear on the debit (left) side of the Ledger and rep- 
resent assets or money invested in property. 

On the other hand, we receive money from stockholders, or 
bondholders and we have to credit those from whom we receive 
the money and the amounts so credited appear on the credit 
(right) side of Ledger and represent liabilities, or money received 
for which we must account. Now the "Final Renewals Fund Ac- 
count" will show a balance on tbe credit side of Ledger, and 
therefore represents a liability, as it should do. 



1 1 



Business Engineering. 

To summarize, Depreciation is charged to Loss and Gain 
(first passing it to the debit of Depreciation Account, if we prefer) 
and credited to Final Renewal Fund (or Depreciation Sinking 
Fund, if we prefer that title) and so we acknowledge the fact 
that Depreciation has been one of the losses of the year and 
establish the amount of that loss and we acknowledge that the 
cash value of this loss is set aside to meet this accrued liability 
and therefore cannot be employed for any other purpose. Cash 
Account and the other asset accounts involved acknowledge that 
they have the custody of these funds and must account for them 
when called upon to do so. 

In my Notes on Repairs and Depreciation I have referred 
briefly to the case where depreciation is covered by reinvesting 
part of the earnings in extensions and betterments of plant, the 
separate earnings from these plant extensions being allowed to 
merge with the other earnings. I explain that, as the earnings 
from these extensions of plant could not be isolated or separately 
identified, it would be necessary to increase the amount to be so 
set aside to cover depreciation, as the amount set aside from year 
to year would not be directly assisted by interest accumulations. 
In this case the accounting steps would be quite simple, for the 
Journal entry would be to charge Loss & Gain, and credit the 
plant account involved. In this respect it would be similar to the 
case of depreciation in merchandise, as later to be referred to in 
connection with the analysis of a balance sheet. In this latter 
case the Journal entry would be : — 

Loss & Gain Dr. 000.00 

to Merchandise 000.00 

For depreciation of merchandise 

in stock, 2 % of $ . 

In the case of depreciation in plant, the entry would be : — 
Loss & Gain Dr. 000.00 

to Plant Account 000.00 

For estimated depreciation of 
plant during the fiscal year, 
ending . 

Lecture Notes. 


While the bookkeeping method that is suggested is, ap- 
parently, a simple one, it does not provide the means of readily 
checking up the accuracy of the estimated cost of depreciation, 
and, of course, it cannot be followed where the sinking fund 
scheme is employed. 

It will be noted that by this method the debit balance of Plant Ac- 
count is reduced by the items credited to that account and charged 
to Loss & Gain on account of depreciation, and thus the asset of 
plant is shown at a constantly reduced value, to correspond with 
the estimated reduction on account of depreciation. Suppose that 
we should each year expend in extensions and betterments of 
plant the exact amount required to cover depreciation. These ex- 
penditures would be charged to Plant Account, and so the orig- 
inal debit balance would be exactly maintained, and this would 
correctly represent the facts, for we should put into plant in the 
form of extensions sufficient extra value to compensate for the 
depreciated value of the original plant. 

As I have stated to you repeatedly in my lectures, the item 
of depreciation is treated by accountants in many different ways. 
I have no desire to support any particular method, but I am 
chiefly interested in bringing you to an understanding of the 
fact that depreciation is to be reckoned with as a constant source 
of loss, and that by some consistent scheme of accounting a com- 
plete and self-explanatory record must be kept of this accruing 




May, 1904. 

The crediting to Depreciation Sinking Fund of the amount 

set aside each fiscal period to cover depreciation of plant appears 

still to trouble a number of the members of the class. I will 

therefore make a further effort to show why this credit is made. 

First let us again call to mind the fact that the plant, day 

by day, month by month, and year by year, will depreciate in 

value and this in spite of the current repairs or renewals put 

upon the plant and paid for out of the current income. We 

estimate that the several parts of the plant will have certain 

lengths of life and by the scheme which I have already described 

we determine what percentage of the cost of the plant must be 

set aside each year to cover the depreciation which has occurred 

during that period. If this were not done, the loss of necessity 

must fall upon capital. 

The losses and the gains of any fiscal period we gather 
together under one account, entitled Loss and Gain. On the 
debit side we write up all the losses and on the credit side we 
write up all the gains. Let us now assume that every such item 
has been written into Loss and Gain Account except this item of 
depreciation. Then Loss and Gain Account will show the gross 
profits,— if any profits have been made,— which must be now 
reduced by the amount of depreciation. In other words. Loss 
and Gain Account now has to its credit a certain amount 
to which it has no claim but which should be credited to some 
account which unll hereafter be called upon to meet the payments 
for the renewal of the several parts of the plant as the times come 
for their iinal renewal. We therefore make an entry debiting 
Loss and Gain with this depreciation item so as to take out from 
that account the credit which it should not have, and we credit it 
to an account entitled Depreciation Sinking Fund (or some 

Lecture Notes. 


equivalent), the account which should have the credit because 
later it will be called upon to stand the cost of renewals. 

You may still say, why should Depreciation Sinking Fund 
be credited with this amount when it is receiving it from Loss 
and Gain? But it is not receiving it. We are simply making 
an exchange of credits. Cash Account, or some other asset 
account, still has the actual money or its equivalent in hand. 

Let us assume for simplicity that it is a matter of Cash and 
that the working capital is all in the form of cash. Then Cash 
Account has not delivered up to Depreciation Sinking Fund this 
amount of money, but we have simply made an entry to show 
that Cash Account instead of owing it to Loss and Gain Ac- 
count now owes it to Depreciation Sinking Fund. If we should 
decide not to leave that money in the hands of Cash Account 
but to set it up as a separate deposit, then when Cash Account 
delivered it— say into the hands of the Safety Trust Company- 
Cash Account would then be credited (balancing the previous 
debit or debits when the money was entrusted to Cash Account) 
and the Safety Trust Company would be debited and we should 
now have two accounts which balance each other; the Safety 
Trust Company being debited with the full amount of the fund 
because the money had been entrusted to its care, and the De- 
preciation Sinking Fund being credited with the full amount 
because later we are going to debit this account with the cost 
of making good the several parts of the plant as they have to 
be renewed. We have reclaimed from our gross profits, year 
by year, the amount required to compensate for depreciation. 
If this amount were found on the books simply as an asset, 
say for instance as a deposit in the Safety Trust Company, it 
might be regarded as a part of surplus profits and therefore we 
would be at liberty to pay it out to the partners or stockholders 
as dividends; in other words, there would be nothing to show 
that this fund was in trust to be used only for a special purpose, 
namely the making good the impairment of capital through 
depreciation of plant. Now in addition we have the credit bal- 
ance in favor of Depreciation Sinking Fund which shows that 
the amount deposited with the Safety Trust Company has been 


F % 






Business Engineering, 

received by us from Depreciation Sinking Fund to be later 
used for a specific purpose and not, therefore, to be regarded 
as part of suplus profits. 

To help you to understand that there can be an exchange 
of cred,ts or of debits without involving cash, let us suppofe 
the following case: 

Smith owes Robinson $ioo; 
Robinson owes Jones $ioo; and 
Jones owes Smith $ioo. 

It is a triangular condition of debits and credits, thus: 



Robinson's Account. 


Jones' Account. 





Jones' Account. 



Smith's Account. 



Smith's Account. 

Robinson's Account. 



Now Jones says to Smith, "I will settle my account with 
you by givmg you the benefit of my credit with Robinson." 

Smith accepts the proposition and Robinson is requested 
by Jones to transfer his (Jones') credit to Smith's account. 

Robmson then makes a Journal entry: 

J°"es $loo 

Dr. to Smith, ^^^ 

which being posted in Robinson's Ledger debits Jones' account 

Lecture Notes. 


$100 and credits Smith's account $ioo for Jones' credit with 
Robinson transferred to Smith; which entries balance Smith's 
and Jones' accounts in Robinson's Ledger. 
Jones makes an entry: 

Smith $100 

Dr. to Robinson, $ioo 

which being posted in Jones' Ledger debits Smith's account 
$ioo and credits Robinson's account $ioo for Jones' credit with 
Robinson transferred to Smith; v/hich entries balance Smith's 
and Robinson's accounts in Jones' Ledger. 
Smith makes an entry: 

Robinson $ioo 

Dr. to Jones, $ioo 

which being posted in Smith's Ledger debits Robinson $ioo and 
credits Jones $ioo for Jones' credit with Robinson transferred 
to Smith; which entries balance Robinson's and Jones' accounts 
in Smith's Ledger. 

So all these credits and debits have been cancelled but there 
has been no transfer of cash in any case. 

This not only serves to illustrate the point under discussion, 
but it also illustrates how much of the world's business is carried 
on by transfer of credits without cash changing hands. 








Accounts 'Taxes/' "Accrued Taxes," "Advance Taxes. 


In my talks I have frequently referred to a certain book 
giving the scheme of classification developed by a committee 
charged with the duty of reporting a uniform system of accounts 
for a certain important industry. 

This book gives the classification of operating expense ac- 
counts ; classification of betterments or property accounts ; forms 
of monthly journal entries and rules for closing. The report 
also includes blank forms for books and statements to be used 
in making the system effective. 

To place the classification scheme intelligently before those 
interested, there is first given the report of the committee, then 
general remarks and instructions, then an index of the accounts, 
then a summary of the sub-divided operating accounts grouped 
under the respective general accounts, then each account is 
defined and explained in detail, a separate page (or more, if 
necessary) being devoted to each account. After these separate 
descriptions of the accounts there are given the forms for the 
regular monthly journal entries, then the "Rules for Closing 
Books at End of Fiscal Year," followed by the closing journal 
entries. These are followed by an index showing to what ac- 
counts the items of expense named should be charged. 

The general accounts are indicated by letters of the alpha- 
bet and the sub-divisions of these accounts by numerals. For 
instance, "Manufacturing Labor," a sub-division of "Manufac- 
turing Account," is shown as A-7, A indicating the general 
account "Manufacturing" and 7 the sub-division of that account, 
"Manufacturing Labor." 

On the pages devoted to the detailed descriptions of the 
accounts appear first the title of the account with the account's 
letter and number, then a definition of the purpose of the ac- 

Lecture Notes. 


count, then the items to be carried into the account, then— if 
need be— the journal entries involved and accompanying ex- 
planations, and, finally, general explanatory notes. 

Thus, sufficient information is given to enable a bookkeeper 
to put the system into effect. In fact, in many cases, some of 
my associates on the committee thought that the explanations 
and notes were unnecessarily elementary. 

After the description of the regular system of accounts 
follows a description of a "Junior" system, which was prepared 
at the special request of certain of those interested in the indus- 
try who felt that the full system would be "too complicated." 

This junior system is simply a condensed form of the com- 
plete system. The general accounts of the fuller system are em- 
ployed, but they are not so minutely subdivided. 

In this connection it is well to quote from the committee's 
report : 

"Your Committee, in preparing a junior system of accounts, 
has been influenced so to do by the expressed demand for a 
simpler system ; but your Committee, in submitting a condensed 
system in accordance with this demand, would call attention to 
the fact that, while a condensation of accounts lessens the actual 
labor in the bookkeeping department, it distinctly adds to the 
labors of the conscientious manager, as it affords him less oppor- 
tunity to effectively analyze his operating costs and make the 
proper comparisons, and such comparisons can then be com- 
pletely made only by laboriously sub-dividing these condensed 
book accounts at greater cost, as the occasion demands." 

In a business of any magnitude it is advisable to have the 
classification of accounts so shown in book form for ready refer- 
ence. Questions, which are sure to arise, can then be promptly 
answered and always answered in the same way. The memory 
cannot always be safely relied upon in such cases. 

I will now quote in full the descriptive matter in the case 
of three of these accounts, and I will use this material to explain 
in detail the questions involved in Advance Payment Accounts 
and Accrued Accounts. 

It is to be noted that with these accounts there appears no 

' » 



J I 


Business Engineering. 

list of items properly chargeable to the accounts, because they 
have to do only with one item — taxes. 

First recollect that in making up a statement of income and 
expense for any period there must be included all items of ex- 
pense or loss, whether they have actually been so far paid or 
not; and we must take credit for such amounts as have been 
paid in advance, the whole payment or part of it being applica- 
ble to a subsequent period as an item of expense or loss. 

Also liabilities which have so accrued must be so shown 
in the Balance Sheets of the following fiscal period; and assets 
which have been built up by advance payment must also be so 

In short, the total earnings and expenses of the period 
covered must be shown quite apart from the question whether 
the earnings are fully represented by cash receipts and the ex- 
penses by cash payments. 

I have selected the case of taxes by which to explain this 

In the classification book referred to, the account of 
"Taxes" appears among the operating accounts; the account 
"Advance Taxes" appears among the advance payment ac- 
counts; the account "Accrued Taxes" appears among the ac- 
crued accounts. 

I now quote from the classification book referred to: 


"This account is intended to show the amount of taxes, 
whether paid, due and not paid, or accrued but not due, applica- 
ble to the elapsed period of the current fiscal year. 

"Taxes — City, County and State. 

"To keep this account accurately, it is necessary to ascertain 
the specific twelve months for which each class of taxes is as- 
sessed and levied. If the period covered by tax levy corresponds 
with the fiscal year of the company, and the taxes are paid at the 
beginning of the period for which such levy is made, the amount 
when paid should be charged to 'Advance Taxes'; but if the 
taxes are due and payable at the end of the period for which such 


Lecture Notes. jAy 

levy is made, the amount when paid should be charged to 'Ac- 
crued Taxes/ 

"If the period covered by any tax does not correspond with 
the fiscal year of the company, the amount of the tax when paid 
should be divided between 'Accrued Taxes' and 'Advance Taxes' 
m the proportion applicable to each. 

"(Payments charged to 'Advance Taxes' shall always be for 
taxes covering a period subsequent to the date such payment is 
made, and payments charged to ^Accrued Taxes' shall always be 
for taxes covering a period prior to the date such payment is 

"Journal entries should be made each month charging 'Tax- 
es' and crediting 'Advance Taxes' with the proportion (one- 
twelfth) of each class of taxes paid in advance and charging 
Taxes' and crediting 'Accrued Taxes' with the proportion (one- 
twelfth) of each class of taxes, accrued but not due, based upon 
the amount shown by the tax rolls, if made up, or if not made 
up, on an estimated amount based on the previous year's tax or 
any other reliable data. 

"Taxes assessed for Improvements to be charged to Real 
Estate Account (see 'Real Estate'). 

^^^^^ 000.00 

Advance taxes ^^ ^ 

For proportion of taxes paid in advance 

applicable to the month of . 

One-twelfth of $ = $ 

State and County, i-i2th of $ = $ 

City and School, i-i2th of $ =$ 

^^^^ 000 . 00 

Accrued taxes ,^ ^^ 

For estimated taxes accrued, but not due, 

applicable to the month of . 

State and County, i-i2th of $ = $ 

City and School, i-i2th of $ = $ 

"NoTE.--At end of the year close this account (Taxes) into 
'Loss and Gain.' " 

This is the end of the page devoted to "Taxes." 

(In the book in place of "Loss and Gain" is shown another 



148 Business Engineering. 

account into which the "Taxes" is closed on its way to "Loss 
and Gain Account" — for simplicity, I show it as going direct into 
"Loss and Gain.") 

*' Advance Taxes. 
"This account is intended to show the amount paid for taxes 
covering a period subsequent to the date such payment is made. 

"Credit this account and charge Taxes' Account each month 
with proportion of taxes applicable to this month. 
"See following entry; 

Taxes 000.00 

Advance taxes 000.00 

For proportion of taxes paid in advance, 

applicable to month of . 

One-twelfth of $ = $ 

State and County, i-i2th of $ = $ 

City and School, i-i2th of $ = $ 

"Note. — See Taxes' for full explanation." 

This is the end of the page devoted to "Advance Taxes." 

''Accrued Taxes. 
"This account is intended to show the amount of taxes 
accrued but not due, covering a prior period. The balance of 
this account will at all times show the accrued liability for taxes. 

"Credit this account and charge Taxes' Account each 
month with estimated amount of taxes accrued, but not yet due 
or payable — estimate to be based on previous year's tax bills, 
unless accurate method of estimating for current year can be 
arrived at. See the following entry: 

Taxes 000.00 

Accrued taxes 000.00 

For estimated taxes accrued, but not due, 
applicable to month of . 

State and County, i-i2th of $....=$... . 

City and School, i-i2th of $ =$.... 

"Note. — See Taxes' for full explanation." 

This is the end of the page devoted to "Accrued Taxes." 

Lecture Notes. 


The explanations as contained in these three pages of the 
classification book would be all-sufficient for one familiar with 

But I have found that you are not able from these de- 
scriptions to fully understand all the accounting steps to be 
taken in connection with taxes. I will therefore go into this 
matter in some detail with the purpose of explaining directly 
this particular case and incidentally Advance Payments and Ac- 
crued Accounts in general. 

What has already been given you on the accounting features 
of Depreciation has furnished another example of the workings 
of an Accrued Account. 

First turn back and read again the note in parentheses as 
quoted from the classification book under the head of "Taxes." 

Now note that in both the Journal entries, "Taxes Dr. to 
Advance Taxes" and "Taxes Dr. to Accrued Taxes," the ac- 
count "Taxes" is debited with one-twelfth of the total yearly 
payment for taxes. Thus all the charges for taxes are made 
through the Journal and when the cash is actually paid Cash 
will be credited and the charge must be made against some 
other account than "Taxes" or we should have this expense or 
loss account charged with an amount not warranted by the facts. 

If a tax bill is paid, part of which applies to a period subse- 
quent to the date of payment, that part will be debited to 
"Advance Taxes." Then the debit balance of this account will 
represent an asset, the asset being reduced in value monthly by 
the Journal entry: 

Taxes 000.00 

Advance taxes 000.00 

Here you see the cash transaction, and hence the Cash entry 
precedes the Journal entry. 

In the case of taxes paid after the liability has accrued, the 
Journal entry 

Taxes 000.00 

Accrued taxes 000.00 

will have preceded the Cash entry. 



A It 



Business Engineering. 

The balance so built up to the credit of "Accrued Taxes" 
will represent a liability. 

Later, when the cash is paid, Cash will be credited, and so 
much of the cash payment as is applicable to periods prior to 
the payment, will be debited to "Accrued Taxes," wiping out the 
liability balance built up by the Journal entries which preceded 
the Cash entry. 

It is then to be particularly noted that in the case of "Ad- 
vance Taxes" the Cash entry precedes the Journal entry, and 
in the case of "Accrued Taxes" the Journal entry comes before 
the Cash entry. 

In the first case, an asset balance is set up bv the payment 
of cash in advance, and in the second case a liabi'lity balance is 
set up by the charging up monthly to "Taxes" (a Loss and Gain 
account) the amounts for which the business has become lia- 
ble, but for which the date of payment has not yet arrived. 

Now let us take a fairly simple case and follow through 
the necessary Journal and Cash entries. 

We will assume that the several tax bills cover the same 
year and that this year and the company's fiscal year coincide, 
and that the tax bills are paid June 30 of each year. 

To make sure that I am understood, I give the following 

Jan. 1/03. 

Dec. 31/03. 


Company's Fiscal Year. 


^ Year Covered by Tax Bills. 


< Accrued Taxes> | < Advance Taxes> 



■ Case assumed. 


Year cove 

Bill paid June 30th. 
red by Tax Bills. . 

Year cover|ed by Tax Bills. 





not as- 

The last two cases might be further varied by showing 
more or less of the tax year prior to January 1/03 (to the left 
of the January i vertical line) or by showing more or less subse- 

Lecture Notes. 




quent to December 31/03 (to the right of the December 31 vertical 

Further variations could be introduced by indicating differ- 
ent times for the payment of the tax bills. 

In the case we have assumed, when the tax bill is paid 
June 30, one-half of the payment applies to the prior six months 
and the other half to the subsequent six months. 

Now suppose we are carr>dng into our Ledger accounts 
each month all items of loss and gain. 

Then for the first six months of the year we shall have to 
employ the Journal entry: 


Accrued taxes 
For estimated taxes accrued, but not 

due, applicable to month of (Jan. or 

Feb. or Mch. or Apr. or May or , 

June) being i-i2th of $. . ., &c., &c. 

Then by the end of June we shall have a Dr. balance to 
"Taxes" equal to one-half of the total yearly charge for taxes 
(provided our estimate was correctly made) 'and a Cr. balance 
to "Accrued Taxes" of like amount, showing the liability estab- 

Now, according to our assumption, the tax bills are paid 
June 30. 

Then Cash is credited for the total amount paid and one- 
half is debited to "Accrued Taxes" and the other half to "Ad- 
vance Taxes." 

The half debited to "Accrued Taxes" wipes out the Cn 
balance which has been built up by the monthly Journal entries! 
This Cr. balance showed that the business was liable for that 
amount on account of taxes accrued. But, the business, through 
Cash, now pays this accrued liability, and so Cash is credited 
and "Accrued Taxes" is debited, the money having been paid 
on its account. So the records are now clear as far as "Accrued 
Taxes" account is concerned. 

The other half of the Cash payment, debited to "Advance 




Business Engineering. 


Taxes, sets up an asset account. It gives a debit balance to 
J^1T.I U^^'X representing „,oney paid out in advance 

r™ n^ r! ^ t^^^ '" '''^'" *° ^' ^^"d^^ed by the State, 
County or C.ty in the way of police protection, fire protection 
street cleaning, &c., &c. pruieciion, 

This balance to the debit of "Advance Taxes" will be re- 
duced, month by month, by the entry: 


Advance taxes 


as already explained. 

w,•n.^^*'!^'".\°•^ '^' ^'"' "'"" successive Journal entries will 
wipe out this debit balance. 

And so both "Accrued Taxes" and "Advance Taxes" will 
be balanced and "Taxes" will show a debit balance representbg 
the total amount of taxes for the year. 

By this method each month's cost has taken its share of 

of th'e'tlx b"r ""'"'"' °' '"^ *^""*'°" °' "-"^ °^ P^^--' 

hf^ Tk . ! ^^'" ^'~""' f°^ "^^ ^^-^ ^^"W have only 
had to bear the charge for its year's taxes ^ 

That IS true in the case assumed, where the tax year and 

n thr;H'"' ' '"'■ '''' '°'"''"''' ""* '* --'d n't be"o 
in the other cases more likely to occur 

that oToTtt' v5' '". '"' '"' ''' "^^^^ °f P^y"-' -^ -<^h 
that part of the bill paid prior to December 31 applies to the 

deVtT"!/"''- l'^"' '' ^^P'^'"^''' this portion will b 
debited "Advance Taxes," Cash taking credit for the tota! 

amount paid. Then the debit balance to^"Advanc Taxes" wH 
represent as many twelfths of one year's taxes as there have bren 
months paid in advance. That is, as many twelfths as h v^ 
not been wiped out by the monthly Journal entries "Taxes Dr 
to Advance Taxes" made subsequent to the payment of "he b^l 1 

This balance to the Dr. of "Advance Taxes" will be ca 
ned over on the Ledger to the next year and will app ar n the 
Balance Sheet of January i as an asset. 

Lecture Notes. 


Now suppose that the tax year and the date of payment 
are such that at the end of the year there is a certain portion of 
the year's taxes not paid. The liability has accrued but the bill 
to include these months will not be due and payable until some 
time in the company's next fiscal year. 

Then we shall have a Cr. balance to "Accrued Taxes" built 
up by the monthly Journal entries "Taxes Dr. to Accrued 
Taxes," representing a liability for so many twelfths of the year's 
taxes as there are months accrued. 

This balance to the Cr. of "Accrued Taxes" will be ear- 
ned over on the Ledger to the next year and will appear in the 
Balance Sheet of January i as a LiabilUy. As already explained 
when during the subsequent year, the tax bill is paid. Cash will 
be credited for the total amount and "Accrued Taxes" will be 
debited for an amount equal to the Cr. balance, which balance 
will include the amount brought over from the previous year 
To further illustrate that "Accrued Taxes" and "Advance 
Taxes" appearing in the Balance Sheet of January i will repre- 
sent a liability and an asset respectively, we may consider how 
Cash will be influenced by these accounts. Suppose there is 
carried over to the next year a certain balance to Cr. of Accrued 
Taxes; this indicates that taxes which have accrued and been 
charged to Tax Account as part of the year's expense have not 
been paid and therefore the cash on hand as indicated by the 
Dr. balance of Cash Account is that much larger than it would 
have been if this debt of the year had been paid. Hence we 
must show a liability to offset the additional cash on hand bv 
reason of this debt. 

On the other hand, suppose we have paid taxes in advance 
for a number of months of the next year, then a certain amount 
will have been taken out of Cash on account of next year and 
the asset cash will be correspondingly reduced. But the condi- 
tion of the business as of January i is the same as though the 
cash had not been paid in advance, therefore the reduction of 
the asset cash is made good by the equivalent asset of Advance 

I have been asked, what happens if the estimate we make 





Business Engineering, 

for the entry "Taxes Dr. to Accrued Taxes," is not correct? In 
this, as in many other instances, we have to base our Journal 
entries on estimate. Here comes in the judgment of the man 
of business and here, in many cases must come in the judgment 
of the engineer. In case of a mistake, the correction must be 
made by Journal entry to correspond with the facts. As already 
explained, Depreciation is a case where ver>' likely correcting 
entries will be required from time to time. 

These steps, if carefully followed through, will show that by 
the double-entry system of bookkeeping we can make the accounts 
for each period show the period's proportion of all items of 
loss and gain and all assets and liabilities. It will be seen that 
if we guided ourselves only by the entries made to show cash 
received and cash disbursed, this would not be the case. The 
transfer of cash is only one feature of a commercial transaction, 
and in some transactions cash is not transferred at any time. 

i 1 


December, 1904. 
While I appreciate that the instruction you have received 
in accounting as given in these notes and my talks has not been 
sufficient for a full command of the principles of accounting 
and the methods employed in double-entry bookkeeping, I still 
think that with the specific training you have received in this 
line and the general training in the line of straight thinking 
which you have received at "Stevens" you ought to be able to 
understand the following analysis of a trial balance and a balance 

Under the circumstances, it may require a strong and sus- 
tained mental effort to enable you to comprehend all the points 
I shall bring out; but this is no more than you are continually 
called upon to do in connection with your studies on the techni- 
cal side of engineering practice. Let me encourage you to make 
this effort, for if you succeed in fully comprehending what fol- 
lows it means that you will have secured a good general under- 
standing of the principles of accounting; and this in turn means 
more than most of you are capable of appreciating until you 
have studied in the school of experience. 

For greater simplicity, I shall consider the case of a trading 
concern rather than a manufacturing or industrial concern. I 
shall introduce a few accounts which manifestly combine in- 
vestment and speculative characteristics, to better enable me 
to make the distinction between the Asset and Loss accounts 
which appear on the Dr. (left) side of Ledger and between the 
Liability and Gain accounts which appear on the Cr. (right) 
side of Ledger. I refer to the following accounts: Phoenix 
Gas Bonds, Norfolk & Western R. R. Stock, and Erie R. R. 
Stock. Of course, the business as a whole is more or less specu- 
lative, as merchandise is liable to fluctuate in value while in our 



r i 


1 n '* 


>■ I 

* ■ 





Business Engineering. 

possession and there are other speculative chances which must 
be taken in this, as in every other business. 

Trial Balance 



December 31, 1903. 
(Showing the Dr. and Cr. balances of all the accounts in the 
Ledger, taken off before closing the books: that is, before car- 
rying into Loss and Gain Account the several loss and gain 
items of the fiscal year ended December 31, 1903.) 


Expense General, $965.89 

Advertising 3,000.00 

Salaries and Wages 12,600.00 

Salary bonuses 500.00 

Traveling Expense 8,675.87 

Agents' Commissions 9,764.76 

Interest Account 845.65 

Store and Office Expense 6,576.83 

Bad Bills 785.00 

Cash 8,675.64 

Merchandise Stock 13,874.25 

Store and Office Furniture 3,184.27 

Phoenix Gas Bonds, 3/m 2,800.00 

Norfolk & Western R. R. Stock, 

25 Shares 1,450.00 

Real Estate 4,500.00 

Advance Interest 650.00 

Interest Receivable 3^5 .45 

Bills Receivable 5,000.00 

Accounts Receivable 6,745 .87 


Erie R. R. Stock 

J. E. Thomas, Capital Account. . 
W. L. Sharp " " .. 

J. R Thomas, Personal Account 


$60,650 . 25 



5,000 . 00 


Lecture Notes. 



W. L. Sharp, Personal Account. 

Interest Payable 

Salaries Payable 

Accounts Payable 

Bills Payable 






$90,919.48 $90,919.48 

Journal — Closing Entries. 


(Being the entries made in the Journal as a basis for transferring 
to Loss and Gain Account the several loss and gain items 
shown on the Trial Balance.) 

Dec. 31/03. 

Dr. Cr. 

Loss and Gain Dr $44,087 . 00 

To Sundries, 

Expense General $965 .89 

Advertising 3,000.00 

Salaries and Wages 12,600.00 

Salary Bonuses 500.00 

Traveling Expense 8,675 .87 

Agents' Commissions 9,764 . 76 

Interest Account 845 . 65 

Difference between all in- 
terest debits and credits. 

Store and Office Expense.. 6,576.83 

Bad Bills 785.00 

Store and Office Furniture. 95-52 
3% for depreciation. 

Merchandise Stock 277.48 

2% for depreciation. 

i '^ 









^58 Business Engineering. 

Dec. 31/03. 

Sundries Dr. 

to Loss and Gain 

Merchandise $60,650.25 

Eric R. R. Stock 560.40 

(profit on 30 shares.) 


Note.— The net profit of $17,123.65 as shown by the Loss 
and Gain Account (following) after posting above two entries, is 
now distributed to the two partners' personal accounts as shown 
by the following Journal entry: 
Dec. 31/03. 

Loss and Gain $17,123.65 

J. E. Thomas, personal account $8,561 .83 

W. L. Sharp, " " 8,'56i.82 

The above three entries are made to close the books for 
the year ending December 31, 1903. 

Notes.— In the simple case here shown Loss and Gain Ac- 
count is used only at end of fiscal period ia determining the net 
result (loss or gain) of the business for the fiscal period, the 
profit or loss being then divided equally between the two part- 
ners, which again closes Loss and Gain Account. 

In the first two Journal entries the facts could be correctly 
shown without including the words "Sundries," and even with- 
out including ''Dr." and "to." 

In the first entry the form then would be: 

Loss and Gain. 

Expense General 

Erie R. R. Stock 

Loss and Gain. 

and in the second entry 

Lecture Notes. 159 

The third entry I have made in the simpler form as an 
additional illustration of how the bookkeeping method or form 
can be varied without involving any essential. 

Loss AND Gain Account. 

Dr. Cr. 

(From the Ledger.) 

Expense General $965 .89 

Advertising 3,000 , qq 

Salaries and Wages 12,600.00 

Salary Bonuses 500 . 00 

Traveling Expense 8,675 .87 

Agents' Commissions 9,764 . 76 

Interest Account 845 . 65 

Difference between all interest 
debits and credits. 

Store and Office Expense 6,576.83 

Bad Bills 785.00 

Store and Office Furniture 3 % . . 95-52 

Merchandise Stock 2 % 277.48 

For depreciation. 

Merchandise $60,650.25 

Erie R. R. Stock, (profit on 30 

shares) 560.40 

Balance carried down Profit.. 17,123.65 

$61,210.65 $61,210.65 

Balance brought down — Profit 

for Term $17,123.65 

Note. — Above shows the Loss and Gain Account in the 
Ledger after posting the first two Journal entries and before 
posting the third entry crediting $8,561.83 to J. E. Thomas Per- 
sonal Account and $8,561.82 to W. L. Sharp Personal Account. 
The posting of this last entry would balance the Loss and Gain 




Si ' 

1 1 


Business Engineering. 

It is assumed that there was no Loss and Gain balance 
brought over from the previous fiscal year. 

Balance Sheet. 

January i, 1904. 
(After postmg all the closing entries from the Journal.) 

^^^^ $8,675.64 

Merchandise Stock 13,596.77 

( 277.48). 
Store & Office Furn 3,o88. 75 


Fhoenix Gas Bonds (3/m) 2,800.00 

Norfolk & Western R. R. Stock 

(25 shrs.) 1,450.00 

Real Estate 4,500.00 

Advance Interest (on B/P) 650.00 

Interest Receivable ^2q 4? 

(On Bills Rcc 1275.45) 

(On Phoenix Bonds 50.00) 

Bills Receivable 5,000.00 

Accounts Receivable 6,745.87 

J. E. Thomas, Capital Account. . c qoo 00 

W. L. Sharp, " '' . . 5,'ooo*oo 

J. E. Thomas, Personal Account. i2,'4o8.67 


W. L. Sharp, Personal Account. 11,350.97 

( 8,561.82) 

Interest Payable ^^^ ^ 

Salaries Payable 1,540.00 

Accounts Payable 4,567.84 

Bills Payable ^j^.^ 

$46,832.48 $46,832.48 

Lecture Notes. 


I first show a Trial Balance taken from the Ledger at the 
end of the business day, December 31, 1903. If not actually 
taken off at that time, it is taken as of that date:— that is, any 
transactions which have occurred between that date and the 
time the Trial Balance was taken are not posted into the Ledger 
until the transactions for the year 1903— which we assume to 
be coincident with the fiscal year— have been finally adjusted 
preparatory to the books being reopened for the year 1904, or, 
if they have been posted, the work has been done so as not t(> 
mix the entries of 1904 with those of the previous year. 

Next 1 show the Journal entries required to close the books 
for the year just ended. 

In these entries all the items of loss and gain are transferred 
to Loss and Gain Account, so obtaining a summary and balanc- 
ing of these several items. One entry charges or debits Loss 
and Gain Account for the sum of all the items of expense or 
loss, and at the same time credits each expense or loss account 
with the amount of its debit balance so that there shall not be a 
duplication of these debit items. The next entry credits to 
Loss and Gain Account the sum of all the items of gain and at 
the same time debits each gain account with the amount of its 
credit balance so that there shall not be a duplication of these 
credit items. The third entry credits to each of the two part- 
ners, J. E. Thomas and W. L. Sharp, one-half of the net credit 
balance of Loss and Gain Account resulting from the posting of 
the first two Journal entries. 

Next is shown Loss and Gain Account as it appears in the 
Ledger after posting the first two Journal entries and before 
posting the third entry. 

Finally comes the Balance Sheet from the Ledger showing 
the balances of all accounts after all the Journal closing entries 
have been posted. The items on this sheet are the balances 
brought down in the Ledger after posting all three of the closing 
Journal entries and after ruling off the accounts, reopening 
the accounts for the next year. 

Your task now is to arrive at an understanding of the 
Balance Sheet as derived from the Trial Balance. To assist you 


1 62 

Business Engineering. 






in this I -show in parentheses on the Balance Sheet against some 
of the accounts certain subtractions and additions which will 
serve to point out how these balances have been derived from 
the balances shown on the Trial Balance. These parentheses 
are not part of the Balance Sheet. 

For instance, on the Trial Balance we find 13,874.25 to 
the debit of Merchandise Stock. That represents the amount 
invested in that portion of the merchandise purchased which 
remains unsold at the end of the year. Now in connection 
with the settlement of the firm's accounts for the year it is 
decided after full consideration of all the facts available that 
there should be written off to Loss and Gain Account for the 
year 2 per cent, of the book value of the stock of merchandise. 
So in the Journal entry "Loss and Gain Account Dr. to Sun- 
dries," we find depreciation included as one of the Sundry items 
and under this head there is $277.48, which is 2 per cent, of 
13,874.25. In the Balance Sheet the reduced and present value 
of Merchandise Stock is shown as (13,874.25 — 277.48=) 
^369^-77* being the previous debit balance as shown on the 
Trial Balance, reduced by the credit for depreciation of $277.48. 
This subtraction is shown in the Balance Sheet in parentheses 
against the item, Merchandise Stock. 

Also, against the items Store and Office Furniture, Interest 
Receivable, J. E. Thomas Personal Account and W. L. Sharp 
Personal Account, are shown in parentheses subtractions or 
additions to indicate how these items have been derived from the 
items in the Trial Balance. 

If you will study the Trial Balance in connection with the 
Journal closing entries you will see that on the Dr. side there 
are accounts which represent assets and other accounts which 
represent losses; and on the Cr. side there are accounts which 
represent liabilities and others which represent gains. 

Here, at first, there seems to be a contradiction. 

The following rules, which I have before brought to your 
attention, help to explain this seeming contradiction, and if you 
will apply them every time you have an opportunity to study a 

Lecture Notes. 


Trial Balance, you will find that your understanding of account- 
mg and bookkeeping methods will rapidly increase. 

Too often rules do not explain ; here is an exception. 

1. An item on the left or Dr. side of the Ledger 

{a) is an Asset if the amount eventually will be received; 
{b) is a Loss if the amount eventually will not be received. 

2. An item on the right or Cr. side of the Ledger 

{a) is a Liability if the amount will have to be paid eventu- 

{b) is a Gain if the amount will not have to be paid eventu- 

To put it a little differently: 

If we have paid out money and it is to be returned to us 
say by the sale of the thing in which the money has been 
invested, then the balance to the Dr. of the account involved 
represents an Asset. 

If, on the other hand, we have paid out money which is 
not to be returned to us, it must be considered as a Loss. 

If money has been paid to us and we have to pay it back 
then the balance to the Cr. of the account involved represents a 

If, on the other hand, we do not have to pay it back it 
represents a Gain. ' 

In connection with the Journal closing entries, apply these 
rules m analyzing the Trial Balance and Balance Sheet. 

The Trial Balance shows us items of assets and losses on 
the Dr. side and liabilities and gains on the Cr. side. 

But in closing the books for the year we have' carried into 
Loss and Gam Account all the Loss and Gain items and the 
net profit has been distributed between the accounts of the two 
partners and so now appears as two liability items. 

Thus we find on the Dr. side of the Balance Sheet only 
asset Items, representing the property or things in which capital 
IS mvested and on the Cr. side only liability items showing from 
what persons or things the business has received its capital. 

If the analysis is carried further it will be seen that certain 
of the accounts on the Dr. side of the Trial Balance in part 




Business Engineering. 

represent assets and in part losses. For instance, consider Mer- 
chandise Stock Account as already referred to. The Dr. balance 
of Merchandise Stock Account as shown on the Trial Balance is 
13,874.25. But we have seen that $277.48 is an item of loss 
through depreciation and that Merchandise Stock as an asset 
account is reduced to 13,596.77, as shown by the Balance Sheet. 

In the same way it can be seen that Store and Office Furni- 
ture Account as shown on the Trial Balance is in part a loss 
account and in part an asset account. 

We also see that certain of the operating accounts are also 
included in the statements of Assets and Liabilities as shown by 
the Balance Sheet. 

For instance, among the assets (Dr. side) we find Interest 
Receivable $325.45. This had been earned, but the time for its 
payment had not arrived. Still it is carried into Loss and 
Gain Account as one of the gains of the year. It is assumed 
that this amount will be received during the next year, so it is 
taken as an asset. When received, it will be credited to Interest 
Receivable, so wiping out this debit, and will not again appear 
as a gain in the Loss and Gain Account of the next year. The 
Loss and Gain feature of this amount has been taken care of 
once for all and now it only has to do with the Asset and Lia- 
bility feature of the business. 

On the other side, we find Salaries Payable $1,540, repre- 
senting salaries which at the end of the year had been earned 
but which had not been paid. It is therefore a liability. 

Coming now to the Securities Investment Accounts, we find 
on the Trial Balance and Balance Sheet the Phoenix Gas Bond 
Account debited with $2,800, which means that $2,800 has been 
invested in those bonds. That is therefore an asset account. 
If later the bonds are sold for less than the cost, the difference 
will be charged up as one of the items of loss; if sold for more 
than cost, the difference will be credited as one of the items of 


This applies also to the Norfolk and Western Railroad 
Stock Account. 

But on the Cr. side of the Trial Balance we find the item 

Lecture Notes. 


of Erie Railroad Stock $560.40. This item does not appear on 
the Balance Sheet. In the Journal entries we find this item in- 
cluded as one of the gains of the year, it being the profit on 
30 shares of Erie Railroad stock. When the stock was pur- 
chased, the amount paid was posted from the Cr. side of Cash 
to the Dr. of Erie Railroad Stock Account. When the stock 
was sold, the amount received therefor was posted from the Dr. 
side of Cash to the Cr. of this account; and as the amount 
received exceeded the cost by $560.40 a Cr. balance of this 
amount was found in this account when the Trial Balance was 
taken off. So here is an account which formerly appeared on 
the Dr. side of the Balance Sheet, as representing an asset, now 
appearing on the Cr. side of the Trial Balance as representing 
a gain. 

Now, let us test the items on the Trial Balance by the rules 
I have given for distinguishing between Assets and Losses on 
the Dr. side and between Liabilities and Gains on the Cr. 

The first nine items on the Dr. side are losses, for they will 
not be received. 

The next item. Cash, can be claimed at any time, and it is 
an asset. 

The next item. Merchandise Stock, is an asset so far as we 
believe it will be received and a loss to the extent that the 
amount debited to the account is in excess of the amount we 
estimate will be received; all as before explained. 

Store and Office Furniture is part asset and part loss, as 
in the case of Merchandise Stock. 

Phoenix Gas Bonds is an asset account, as no reason ap- 
pears for believing that the amount to Dr. of the account is in 
excess of the value of the bonds represented. 

Real Estate is an asset account as representing real estate 
worth $4,500. 

Advance Interest is an asset account, as it represents the 
payment in advance for the use of money. If the loan were 
cancelled December 31, 1903, we can assume that this $650 
would be returned. If the loan is not cancelled we can assume 

- \ 




Business Engineering. 

that this $650 will be received through the use of the money 
on which this advance interest has been paid. 

The next three items represent amounts to be received, and 
are therefore asset accounts. 

Turning now to the Balance Sheet, we find the first nine 
accounts do not appear as they are loss accounts, but the last 
ten do appear as asset accounts, though Merchandise Stock and 
Store and Office Furniture in reduced amounts, as explained. 

Coming back to the Trial Balance, the first item we find 
on the Cr, side is Merchandise. This will not have to be paid, 
for it represents the year's profits made in the purchase and 
sale of merchandise; it is therefore a gain. 

Erie Railroad Stock, for the same reason, represents a gain. 
The next two accounts represent the amounts loaned to 
the business by the two partners. These amounts will eventually 
have to be paid, and therefore represent liabilities. 

The next two accounts represent the profits credited to the 
partners which have not yet been withdrawn. These amounts 
will have to be paid, and are therefore liabilities. 

The next two accounts represent amounts which have been 
earned against the business but have not yet been paid ; eventu- 
ally they will have to be paid, so they are liabilities. 

The next item represents approved accounts for services we 
have accepted or for goods we have used or have on hand. 
These accounts must be paid, so "Accounts Payable" represents 
a liability. 

The next account. Bills Payable, represents notes which we 
have issued in payment for services or goods, and as these notes 
must be paid, the account represents a liability. 

Turning again to the Balance Sheet, we do not find the 
items "Merchandise" and "Erie Railroad Stock," the two gain 
accounts, for they have been carried into Loss and Gain Ac- 
count, but we do find the last eight accounts representing items 
of liability. 

Finally, it must be understood that the condition of the 
business has not been altered by the changes which are shown 
by a comparison of the Trial Balance with the Balance Sheet. 

Lecture Notes. 


Since the Trial Balance was taken off there have been no further 
business transactions, or if there have been any, they have not 
been taken into account in preparing the Balance Sheet. Cer- 
tain adjustments for depreciation and the like have been made. 
The facts as they before existed have been acknowledged and 
recorded. The differences between the Trial Balance and the 
Balance Sheet result from bringing together all the loss and 
gain items, balancing them against each other in Loss and 
Gain Account, and the crediting to each of the partners* per- 
sonal accounts one-half of the credit balance to Loss and Gain 
Account obtained by deducting the sum of the loss items from 
the sum of the gain items. 

Having so closed the books and ruled off the accounts in 
which the sum of the debits equals the sum of the credits, and 
brought down all the Dr. and Cr. balances in the case of ac- 
counts in which the sum of the debit items and the sum of the 
credit items are not equal, the books are ready to receive the 
entries for 1904 and now the loss and gain accounts will be re- 

The case I have taken as an example is a very simple one. 

It can readily be seen that, in a manufacturing business, the 
accounting and bookkeeping complications are greatly in- 

In the case of a large manufacturing concern it would be 
necessary to keep the books so that all steps in each branch 
of manufacture would be cleariy represented in the accounts. 
To this end the accounts would be divided and sub-divided so 
that the items of cost would be classified to correspond to our 
proposed analysis of costs. A scheme of classification which 
thus multiplies the number of accounts to provide the means 
for ready and accurate analysis of costs may be considered com- 
plicated and burdensome by the bookkeeping department, and 
is frequently objected to by bookkeepers on that score. It is 
then to be remembered that in the case of a large business it 
pays to so increase the labor and expense of the bookkeeping 
department provided the manager and his assistants are thus 




Business Engineering. 

provided with the facilities for constantly keeping themselves in- 
formed in the minutest detail of the cost of operation. For a 
concern doing a large and complicated business nothing could 
be more complicated than a condensed classification of accounts, 
for the analysis of costs could then be effected only by picking 
out of these condensed accounts, item by item, the information 
required. This should be provided for in advance through the 
adoption of an extended scheme of classification designed to 
present the business records in the most complete and con- 
venient form for the information of the management at any and 
all times. 

I hope we may have time to take up this branch of our sub- 
ject in connection with a consideration of store-room inventories 
and shop cost. 



December, 1904. 
In this course of lectures on some of the features of engi- 
neermg practice, I wish to give at least brief attention to the 
important subject of analysis of data. 

In your professional work you will continually be called 
upon to refer to the record of experiences and opinions of 
others. You will consult text books, the transactions of techni- 
cal societies and other authorities more or less qualified. Before 
accepting data, and especially so when some definite question is 
at issue, you should form an opinion as to its reliability and 

In collecting your evidence you will have to deal with con- 
flictmg, or apparently conflicting, statements. First, you should 
determine whether or not the statements are conflicting, and if 
you so decide you must then determine their relative ' values 
Frequently, a careful analysis will show that there is no real 
conflict, for the statements do not cover exactly the same 
ground, and, therefore, cannot be fairly compared. 

I have already pointed out to you the danger of accepting 
any partial or incomplete statements. I have told you of in- 
stances in my own experience where partial statements of two 
or more men, of acknowledged repute as experts in their line 
and reputed to be honest, had been so combined as to give an' 
apparently complete certificate of good character to some proc- 
ess or device. In many of these cases, my investigations have 
shown that these statements, which, when combined, appeared 
to offer a sufficient guaranty of efficiency, had not been pre- 
pared as the result of coincident investigations, and, therefore 
were worthless when so combined to form a complete record. 

I think of an instance where two such partial statements 
were signed by two professors of a college of engineering of 
the first rank. One certificate furnished a most satisfactory 



Business Engineering. 

verification of the claims made as far as quantity of product 
was concerned, and the other furnished an equally satisfactory 
verification of the claims as to quality. The adroit promoter 
had so combined these two statements in the prospectus of the 
company as to satisfy the ordinary investor so that he was will- 
ing to risk his money in the venture. These professors, as 
ordinarily careful and intelligent men, should have known that 
the claims made for the process — considering both quantity and 
quality— were impossible of accomplishment, and that to obtain 
the results claimed would furnish a demonstration of perpetual 
motion. And, yet, these professors were each willing to give a 
certificate for the isolated results as they saw them without 
going deeper into the subject. My own investigations proved 
that if the result as to quantity was obtained, then it was im- 
possible to verify the claim as to quality, or if the claim as to 
quality was verified, the claim as to quantity was impossible 
of verification. I could cite many such cases from my profes- 
sional experiences. 

This all indicates that in the analysis of data we must be 
careful to include in our investigations all the points involved; 
especially we cannot safely take any isolated statements or even 
any isolated facts. We must read every statement with its 
context, and, as honest and intelligent men, if we quote a state- 
ment of fact, or opinion, we should quote that statement with 
its context, and we should ourselves be careful to bear in mind 
the context. 

Take, for instance, a case in my own special line of work 

gas engineering. We frequently find comparisons made of gas 
leakage on the basis of per cent, of output. In one city, the 
leakage (so called) may be 5 per cent, of the total output; 
whereas, in another city, the leakage may be 10 per cent, of 
the output, and still, the latter may, upon even superficial investi- 
gation, indicate greater efficiency of plant and management. 
This may be readily seen. Suppose we have two companies, 
A and B, with exactly the same mileage of mains and exactly 
the same leakage, as measured by the per cent, of volume sent 
out or as delivered to the mains. But we find that A is sending 

Lecture Notes. 


out twice as much gas as B. Or, to be more definite, let us 
suppose that A is sending out 200,000,000 cubic feet per annum; 
whereas B is sending out only 100,000,000 cubic feet per annum. 
Let us suppose, further, that the leakage in each case is 5 p€r 
cent, of the output. Then, the actual amount of loss by leakage 
in the case of A is 10,000,000 cubic feet per annum; whereas 
the loss of B is only 5,000,000. So we find that B's leakage is 
only one-half the leakage of A, in spite of the fact that by 
the statement in the form of per cent, the leakages are equal. 

To still more completely show that leakage of several com- 
panies cannot be compared on the basis of per cent, of output, 
suppose we have a company which has just completed its main 
system and turned the gas into its mains but has not yet con- 
nected up the mains to any of its consumers' meters. In this 
case, all the gas that passes from the mains would be leakage, 
and hence the leakage would be 100 per cent. 

In spite of the facts here shown, there are many people in 
the gas business who make their leakage comparisons on the 
per cent, basis. For instance, they see that a certain company 
has a leakage of 5 per cent, of its output and they are, therefore, 
satisfied that the mains are in fairly good condition and that 
the management is satisfactory. They see another case where 
the leakage is 10 per cent, and they assume that the mains are 
in unsatisfactory condition; whereas it is quite possible that, in 
the latter case, the distributing plant is in better condition than 
that of the first case. The large p^r cent, of leakage may, of 
course, indicate that fault may be found with the sales depart- 
ment, but the efficiencies of the two departments are not to be 

V This leads me to point out that the intelligent analysis of 
data is required when we are attempting to make comparisons 
between the efficiencies of management of the several depart- 
ments of a single concern. In connection with my talks on 
accounting, I have tried to impress upon you the fact that if 
we are to obtain the most economical management through 
the many steps included in operation, we must be able to deter- 
mine through a systematic statement of items of cost exactly 


Business Engineering. 

where there is room for improvement and where we may, at 
least for the present, be satisfied with the result obtained; 'so, 
m connection with our present subject, we must be prepared 
through a careful consideration of all data available to deter- 
mme as to the relative efficiency of the management of the 
various departments of any business in which we may be con- 
cerned. I am reminded of something that happened some years 
ago. I shall not go into the details, but it is sufficient to say 
that m connection with the arguments made from time to time 
for the introduction of an improved form of retort furnace and 
settmg, an old engineer in charge of one of the largest plants 
in the country repeatedly stated that his old benches, antiquated 
m design, cost him much less money to install and were giving 
just as good results as those claimed for this new and more 
expensive form. His works later came under my management 
and I then found that there was apparently a very large leakage 
amountmg to about 33 per cent, of the output. Investigation 
proved that the mains were in better condition than any other 
part of the plant and the superintendent of the mains was the 
most efficient official in the company's service. The explanation 
of this apparent conflict in the facts was suggested when I dis- 
covered that the statement of the amount of gas manufactured 
was obtained by a system of estimating. There was not suf- 
ficient station meter capacity to register the total amount made, 
so from time to time experimental runs were made the gas 
being measured through a small meter. The total coal car- 
bonized was credited with the rate of production established by 
these experiments. Further investigation proved that these ex- 
perimental or test runs were entirely unreliable as a basis of 
estimate. As soon as the gas was correctly measured the state- 
ment of gas produced was materially reduced, and so the state- 
ment of the amount sent into the mains was reduced, and in turn 
the per cent, of leakage was reduced. Thus it was shown that 
the management of the works was much less efficient than the 
records had indicated, while the management of the distribution 
department was much better than the records had indicated. Fur- 
thermore it was found that the claim made that the old-style 

Lecture Notes. 


benches were as efficient as the improved (regenerative) benches 
was entirely without warrant. 

When we are called in as engineers to investigate any pro- 
position as to the worth of a plant or a business, we at once 
have to call in our powers of analysis. A man who is not capa- 
ble of fairly and intelligently analyzing data is worthless as an 
investigator. A large part of my professional life has been spent 
in the investigation of claims more or less extraordinary. I 
believe I am correct in saying that in a majority of these cases 
where specific claims had been made as to quantity and quality 
of product, upon going to the works to investigate, it has been 
discovered that there were no means on the ground for com- 
pletely measuring quality, or quantity or both, and that these 
extraordinary claims had been derived from more or less elabor- 
ate systems of estimation in which the wish was father to the 
claim. For instance, I at once call to mind one case where 
the most extraordinary statements had been made in regard to 
the quantity of gas produced from a given quantity of coal. 
These statements had been widely accepted and many men of 
standing in the business world had been induced to invest in 
the company controlling the process. Certificates had been fur- 
nished by engineers who were supposed to be capable and 
honest. When we undertook the investigation, we found that 
there was no station meter for measuring the quantity of gas 
produced, and the measuring was done by noting the rise and 
fall of a gas holder, and this without allowing for change of 
temperature which amounted sometimes to as much as 40° 
Fahr. Furthermore, it was found that the amount of coal used 
had been determined by the use of small platform scales and 
that there was no evidence that the coal, as supplied to the ap- 
paratus, had always been weighed. The records of ordinary 
laborers had been taken in this case. When we came to check 
up the treasurer's books with the coal pile, we found that the 
latter was **short" and that nearly twice as much coal had been 
used as had been included in the statements of cost. 

Again, in the case of gas process investigations we have 
to test the claims as to quality by accurate measurements of 


Business Engineering. 



candle power and calorific value. I call to mind a case, and a 
most important one, where the gentleman whom I was assisting 
had come from Europe for the express purpose of investigraing 
the claims made for a certain process. The investigation was 
earned on through a number of different works. At one of 
these, when we came to use the photometer to determine the 
candle power of the gas, we found that the sight box could be 
moved through a range of four candles without making any 
marked difference in the distinctness of the image on the disc 
and, yet, this photometer was in charge of a man who had an 
unusually good reputation for his ability in laboratory observa- 
tions. I think of another instance where a certain engineer had 
been for years claiming that, by his method of scrubbing and 
condensing, the gas acquired or retained an additional illuminat- 
ing value of two candles. Later, these works came under my 
direction and I found that the photometer upon whose accuracy 
these claims for increased eindency depended was out of adjustment 
at a number of points, the candle balance was non-sensitive and 
the Bunsen disc had been in use for about ten years and had 
long since outlived its usefulness. As soon as the photometer 
was re-equipped and re-adjusted it was found impossible to 
detect any increase in candle power due to this special method 
of scrubbing and condensing. Still, these claims had been ac- 
cepted on the reputation of the inventor and considerable appara- 
tus had been sold by reason thereof. 

In making our comparisons on the relative cost of product 
or on relative efficiency of plant, we must be careful not to mag- 
nify the importance of any one item at the expense of any other 
Item, or, worse yet, at the expense of all the other items. While 
the case must be considered with regard to each of the indi- 
vidual Items, we must also consider the case as a whole. 

Again, I am reminded of an experience where we were 
endeavoring to eliminate a waste due to heat escaping from a 
certain piece of apparatus. We devised an addition to the ap- 
paratus which was intended to recover a large portion of this 
heat. At first the result was most encouraging and we were 
apparently making a satisfactory saving on each thousand feet 


Lecture Notes. 


of gas produced. At the end of six months, however, the re- 
pairs on this additional apparatus had increased until the cost 
for repairs was twice as much per thousand as the apparent 

In making our investigations, we should be sure that the 
instruments used for our measurements are completely adjusted 
and standardized. For instance, in the case of gas investigations 
we should be certain that the means employed for measure- 
ment of volume are correct and that the photometer which is 
used for the measurement of candle power is accurate. We 
should, still further, be positive that the gas we are measuring 
is the gas that is being produced. I recall an instance where, 
after two weeks of hard work, the men engaged on the investi- 
gation found that they had been measuring for candle power 
gas taken from another pipe than the one they had supposed. 
In other words, their measurements of volume were correctly 
taken but the measurements for quality were made on gas 
produced by another apparatus. 

I will give you another instance by quoting from a letter 
received not long ago: 

"Recently we had occasion to make a fuel test and I found 
that the man in charge failed to properly test the scales before 

"He was weighing wagons of approximately 1,800 pounds 
each. The test he made of the scales was to stand a man in 
the centre, get his weight, stand him at each corner and get 
his weight, and find that each time the weight of the man was 
shown to be the same as when he was weighed on the standard 
scales. This was regarded as satisfactory evidence that the 
scales were correct. I believe that further it was determined 
that the scales worked freely— turning for a small additional 
weight, and that everything was clean about the pit. 

"After the test had gone on for some time it was found 
that the scales were not weighing the same as another set of 
scales, and it was ascertained that the platform and its supports 
were not sufficiently rigid and had been bent under the 1,800 
pounds weight." 


Business Engineering. 


that het o :'a: el, "^'^^'°"^ ^' ^'''^"'^ '^ -- 
Plete statements of facranH^l'"^,^' ^'"'"^ ~"^« ^"^ ^°'"- 

selves. When wrdo?. "^ ^T " ^'' "^ investigating for our- 

cause we have jtsl alJ^Sy t^f 't ' ^'°""^ ''^ '"^- 
therein, or we should n L,f statements contained 

by stating our authorir °" '''*'"'"*^' "'"^ """^^^^' 
Or to state it more briefly :— 
Be thorough. 
Do not be led. 
Keep your wits about you. 
Use your common sense. 
State what you know. 


December^ 1904. 

Incomplete as this collection of Lecture Notes is, failing as 
It does to specifically touch upon some important business fea- 
tures of engineering practice, I feel that some definite reference 
to estimates and specifications must be included. 

In my talks I have frequently made incidental reference to 
this branch of my subject, and especially when describing and 
illustrating the use of the statistical and auxiliary books which, 
combined with the regular books of account, should provide a 
complete record of the transactions of an industrial concern. 

First we have to bear in mind that we must consider this 
subject from the standpoint of the buyer and also from that of 
the seller. Some of you as contracting engineers or manufac- 
turers will have to submit to the stipulations contained in the 
specifications and contracts prepared for your guidance and 
control. Some of you after so contracting may sublet parts 
of your contract to others and so become interested in the 
preparation of such specifications and contracts as will in turn 
guide and control those whom you are bringing in to share 
your responsibilities. 

Again, some of you as consulting engineers may have to 
occupy a more neutral position in representing the purchaser, 
or standing between the purchaser and the manufacturer or 

So what I have to say should be capable of fair applica- 
tion by either party to a transaction in which is involved an 
estimate, a specification and finally a contract. 

In case of any piece of work to be performed the first thing 
required preliminary to a contract, is that the exact character of 
the work shall be fully and explicitly defined. 

This calls for the preparation of exact and comprehensive 
engineering drawings. While I know that this part of your 


Business Engineering. 

technical training has been fully cared for in other of our de- 
partments, still, before passing on let me emphasize as an 
important feature of engineering practice that all engineering 
drawings should be completely self-explanatory and should be 
checked up in every possible way before we employ them in 
connection with a specification as part of a contract. Unfor- 
tunately, it is too common an occurrence to find that the several 
parts of a drawing or set of drawings do not support each other 
as to dimensions or features of design or both. 

For a piece of work of any importance specifications should 
be carefully prepared and made to agree in every particular 
with the engineering drawings. It will frequently be found 
that the effort to bring about this agreement will indicate the 
necessity for modifying the drawings or the specifications or 


For the moment, I cannot think of any one thing mcluded 
in engineering practice which is of such vital importance from 
both the technical and the commercial standpoints as this 
preparation of drawings and specifications complete, comprehen- 
sive and exact in all necessary details and in perfect harmony 

with each other. 

In the case of work of any magnitude, only by such complete 
planning ahead can the best possible result be obtained from 
the minimum of capital expenditure. Here it is to be seen how 
the technical and commercial features of engineering practice 
are interwoven from the very beginning of any industrial under- 


Where a certain class of work is being frequently repeated, 

with comparatively minor modifications to meet local or special 

conditions, standard drawings and standard specifications should 

be developed. As soon as any difficulty appears in connection 

with any one undertaking from which we can gather experience 

for future application, the standard drawings and specifications 

should be modified ; or, if a general modification is not deemed 

advisable, notes should be made for our guidance in any similar 

future case. 

If in the same business a number of lines of work are fol- 


Lecture Notes. 


lowed, as many sets of standard drawings and specifications 
should be prepared. 

For each special line an estimate book should be developed 
in which there shall appear every item that experience has shown 
will be required. This in turn should be supplemented when 
experience shows us, as it unquestionably will, that in our 
previous estimates some items were omitted. The last item on 
the list, one that should never be omitted, is that of contin- 
gencies; for no matter how careful or conscientious we have 
been to include separately all sources of expense there will be 
some omitted. For in every engineering undertaking in which 
variations are introduced through change of location or other of 
the limiting conditions, there will be required a change in our 
specifications. Furthermore we must include a contingency 
item because we cannot determine in advance the cost of the 
unavoidable chances which enter into the performance of every 
piece of engineering work of any importance. Some engineers 
provide for contingencies by making a liberal estimate of cost 
on each important item. I prefer to place against each item 
what I believe will be its cost as exactly as I can estimate it on 
present market conditions and then add one item for contingen- 
cies, say in ordinary cases lo per cent, of the total cost of all 
the specific items. The cost of each item must include the cost 
of placing the material or the men on the ground where the 
plant is to be erected or we must include as separate items the 
cost of transportation, including freight, carting, insurance, &:c. 
In making up the items of an estimate we must be careful to see 
that there is no gap between the items which cover transporta- 
tion and the items which cover erection. Not infrequently, 
actual cost exceeds estimated cost because material has to be 
stored and rehandled after delivery and before erection or be- 
cause wages have to be paid to men waiting for the opportunity 
to commence their work. 

An intelligently prepared estimate book can be made to 
be worth many times its weight in gold. Such a book, modified 
and corrected from experience is of the utmost value in the 
preparation of specifications for future undertakings. Its 




Business Engineering. 

records, including the special data in each case, should supply 
the means for making as correct an estimate as is possible. 
But even if we exercise all possible care and intelligence to 
correctly cover all other items of cost, this item of contingencies 
cannot safely be omitted, and in certain special cases it must 
provide for elements so uncertain in their character that a con- 
siderable risk must be taken or a large amount must be in- 
cluded to ensure safety. If the estimate is prepared as the basis 
for a competitive bid on work to be performed, such a necessarily 
large contingency item may be a decided disadvantage, for one 
or more of the other bids may be offered by those reckless or 
dishonest enough to take their chances without so ensuring 
themselves against loss, on the theory that if the cost goes 
against them they will be able to escape from the full force of 
the contract by one means or another. In such cases, the 
honest and careful contractor cannot allow himself to be in- 
fluenced by fears as to what his competitor may be willing to do. 
From an estimate book such as I have outhned, another 
book can be developed, which may be employed to the greatest 
advantage in the actual performance of the work. As work 
under a contract progresses, especially if the work is being 
executed at a point far removed from the home office, it is of 
vital importance that those who are responsible at the home 
office for keeping the resident engineers supplied with the neces- 
sary material and men, should constantly have before them a 
record, correct to date, of the ordering and forwarding of ma- 
terial and men and of their arrival or non-arrival on the ground. 
This book then should have columns so prepared that against 
each item can be recorded all the various steps taken between 
the ordering and the actual completion of the work. It is there- 
fore important that spaces should be provided for necessary 
notes in regard to working drawings and modifications and 
additions thereto, the necessity for which may develop as the 
work progresses. 

The resident engineer should be notified of all drawings, 
material and men forwarded and he should be required to 
promptly acknowledge their receipt. All these steps should be 



Lecture Notes. 


noted in this estimate or contract record. The notifying of the 
resident engineer may well be done through carbon copy books, 
so that we may be sure that the original sent to him is an exact 
duplicate of the carbon copy retained in the home office. These 
carbon copy books may be conveniently used for illustrating by 
sketches minor details required to modify or further explain 
features of construction on which questions have arisen during 
the progress of the work and which have been referred to the 
home office for further explanation or decision. The orders for 
material should also be made out on carbon copy books so 
that one copy may be sent to the concern from which the 
material is ordered, one copy to the resident engineer in charge 
of the erection and the third retained in the home office. 

As I have said, every one of these steps, as they are taken, 
should be noted in the Contract Record Book according to a 
prearranged system. The final vertical column in this record 
should be one to show the total cost of each item, there being 
other columns to show how this final cost is made up. 

When the contract is completed this contract or estimate 
record should be checked up with the treasurer's books to make 
sure that the cost as shown in the book which is to guide us in 
future estimates exactly corresponds as to total cost with the 
figures shown in the regular books of account. To the inex- 
perienced student it may seem strange that I take the time to 
make this point; but this is vital in the operation of such a 
scheme as I have now barely outlined. It is true, unfortunately, 
that here and in many other directions, the statistical and auxiliary 
books of an industrial concern are not always made to balance with 
the regular books of account. Very often these two classes of 
books are kept in different departments — the regular books of 
account in the Commercial Department and the auxiliary books 
in the Engineering or Construction Department; and not in- 
frequently, sufficient friction exists between these two depart- 
ments to prevent them from loyally co-operating to obtain a 
complete result, so necessary for the good of the business. 
The man then who is responsible for the business as a whole 
should see to it that this co-operation is developed and con- 




Business Engineering. 

stantly maintained. But if the manager is a technically trained 
engineer who regards bookkeeping as something below his 
dignity as a professional man, he will not be ready in the first 
place to call for such co-operation nor, in the second place, will 
he be competent to ensure it by proper supervision and direction. 

Now let us go back to the more specific consideration of the 
preparation of the specifications. 

It can readily be seen that an estimate book such as I have 
outlined can be employed to great advantage in the preparation 
of specifications, provided the concern which operates the book 
is responsible for the preparation of the specifications. Such is 
not always the case, but often it is so. 

Even in the case of a consulting engineer, some such record 
as I have outlined would be convenient, if not actually necessary. 
Again, frequently the one charged with the responsibility of 
preparing the final detailed specifications, which after acceptance 
are to be attached to and become, with the drawings, a part of 
the contract, is the contractor. 

If, on the other hand, the bids are called for by a concern 
which is not definitely informed as to what should be required 
under the proposed contract, the probabilities are that such a 
concern will call in to its aid a consulting engineer or put itself 
at once in the hands of some contracting specialist who has 
by his integrity, common-sense and professional ability earned 
for himself a reputation upon which broad-minded business men 
will be willing to place their dependence ahead of everything 

Suppose now we have prepared an estimate in our esti- 
mate book as the basis for a bid, this bid to be accompanied by 
a specification, more or less clearly itemized according to the 
present requirements. The details as given in our book may 
be quite plain to us, but now the question comes up, will they 
be perfectly plain to the other party to our proposed contract? 
This at once brings to our notice the fact which I so frequently 
try to impress upon you, that a sound working knowledge of 
the mother tongue is of vital importance to the engineer. Not 
only must the specification convey to us a description of the 

Lecture Notes. 


items covered in our estimate, but it must convey that meaning 
to the other party of the proposed contract. 

While it is desirable that the specification shall be expressed 
in language precise and concise, it is far more desirable that it 
shall be expressed in language admitting of only one meaning, 
no matter how inelegant that language may be. We should 
not hesitate to use the same words over and over if we are 
sure that our meaning can be thus made more certain of correct 
interpretation. We must bear in mind that if we make an 
apparently plain and simple statement of fact before an audience 
Hmited in number, hardly two of the listeners in that audience 
will have conveyed to his mind by the spoken words exactly 
the same impression. This should constantly influence us to 
exercise watchfulness and care even in the preparation of our 
less formal business communications. As I have pointed out 
in my talks on commercial law, much of our correspondence is 
to be classed as the groundwork for contracts of one kind and 
another, and carelessness in expression may, to our surprise and 
disgust, lead us into annoying and expensive lawsuits. I have 
also shown you from my own experiences how the haste which 
leads us to write communications that are not completely self- 
explanatory in the first instance entails upon the sender and the 
receiver the expenditure of time and nerve energy many times 
greater than that which would have sufficed in the' beginning to 
have made the initial communication complete. You will re- 
member that I gave one instance where I arranged for the 
exhaustive analysis of all of one class of correspondence pass- 
ing through a certain office during six months. The result was 
a surprise to all concerned. It was found that the record of 
letters written which would have been unnecessary had the in- 
itial communications been correct and complete in every detail, 
ranged from 102 letters explaining and correcting 6 monthly 
reports to 10 letters explaining and correcting 9 monthly reports. 

Bear in mind that many of these men whose records were 
so analyzed were technical graduates. 

For the warning of those of you who are inclined to slight 
what some ignorantly and foolishly classify as little things, and 


Business Engineering. 

Lecture Notes. 


for the encouragement of those of you who are thorough and 
conscientious in details, let me point out that in the business world 
where such inability and indifference or lack of conscientious- 
ness are continually made apparent in unsatisfactory results, 
how the over-worked, harassed manager of today must turn with 
open arms to the — I am sorry to say — exceptional employe who 
lightens his pressing burdens by completely performing the tasks 
assigned to him. Young men often complain to me because, 
as they say, there are not the same opportunities to make their 
way as there used to be. There always will be this opportunity 
for the capable, thorough and conscientious men any time this 
side of the Millennium, and that is about as far as we need look. 
In spite of all the care, intelligence and specialized training 
which may be exercised in the preparation of specifications it 
is still impossible to avoid all mistakes and disputes as to inter- 

Apart from differences of interpretation of words, meant by 
the engineer to express a definite thought or intention on his 
part, cases must arise where it becomes necessary, or is con- 
sidered advisable, to modify the original plans by reason of facts 
which first come to light after the work has been begun. 

The items for extras are a fruitful cause for dispute in con- 
nection with the settlement of contracts. Unfortunately, some 
contractors endeavor to provide in their contracts a place for 
the later introduction of extras, hoping thereby to get pay at 
higher rates for part of the work and at the same time lead the 
other party on to the making of a contract by holding out the 
bait of a low lump-sum contract price. The conscientious engi- 
neer and contractor should do all in his power to reduce to a 
minimum the necessity for extra charges. 

When it becomes apparent that such extra charges will have 
to be made or when it becomes apparent that modifications of 
the specifications are required, steps should at once be taken 
to arrange a supplementary agreement between the two parties 
to the contract, rather than leave the matter in indefinite shape 
as the probable cause for dispute or possible litigation at the 
time of final settlement. 

The several clauses of a carefully prepared specification 
may be divided into two classes : — 

General Clauses, which define the general conditions un- 
der which the contract shall be executed, the relative responsi- 
bilities of the two parties to the agreement, the lines to be fol- 
lowed in regard to acceptance on the part of the buyer, terms 
of payment, and the like ; and 

Specific Clauses, which cover the details of design and 

It is well to carefully separate and classify the several items 
of the specifications in this way, bearing in mind that then the 
specification becomes the very substance of the contract. 

The general clauses can commonly be made standard, to ap- 
ply almost without alteration to all contracts of a certain class. 
This portion of the specification form should therefore be 
amended and added to as experience suggests. The original 
form and all changes should be submitted for approval to a 
competent legal adviser. It is well here to remind you that 
whenever a doubt is suggested as to the best form in which 
to express a business paper so as to secure the maximum of 
protection under the law, go to a good lawyer. You believe 
it is wise for those not specifically trained in engineering science 
to consult a specialist as questions in that line arise; you, then, 
should be prompt to recognize the wisdom of engineers con- 
sulting lawyers when the special question to be solved is one of 
the law. 

I shall not here attempt to set before you specimens of 
specifications as actually employed in the field of engineering. 
Such examples would necessarily vary very greatly with every 
branch of engineering considered. It would be only in general 
that such examples could be employed to advantage in such a 
crowded course as ours at ''Stevens," especially as we find by 
our Alumni Directory that our graduates by no means confine 
themselves to the one branch of engineering which, for want 
of a better name, is styled Mechanical Engineering, but are to 
be found occupying positions of importance in every branch 
of engineering practice. 


Business Engineering. 


I would strongly advise you, however, as you settle down 
to practice in any one branch of our profession, to make a 
special effort to collect representative specifications from en- 
gineers of good repute. These men will frequently be found 
willing to furnish such specification forms in individual cases 
where they might be unwilling to furnish them for inclusion in 
these notes, which are intended for more or less general distri- 

I would especially advise all of you to procure, if possible, 
a copy of the lecture on "Specifications" delivered before the 
Senior Class of Rensselaer Polytechnic Institute, April 30, 1903, 
by Dr. J. A. L. Waddell, of the engineering firm of Waddell & 
Hedrick, Kansas City, Mo. 

I have not so far prepared anything specific with reference 
to that important business feature of engineering practice ; name- 
ly, the necessity for practicing within the limits set by com- 
mercial conditions. I have not thought it well to longer hold 
back the printing of these notes for a paper on this subject, for 
three reasons: — 

1. Mr. W. M. McFarland's article, reprinted from Gassier' s 
Magazine^ and included in the "Reprints of Lectures and Pa- 
pers," should be sufficient, unsupported by further words on my 
part, to convince intelligent engineer-students that the condi- 
tion named is one with which they must be prompt to comply ; 

2. I am continually including illustrations of this truth in 
connection with all my talks on the other business features of 
engineering practice ; 

3. It should not be difficult for a student possessed of 
sufficient intelligence to successfully meet the test of three years 
of our "weeding-out" process to appreciate that an engineering 
design or an industrial undertaking must necessarily be along 
lines which will afford an adequate return to the investor; that, 
therefore, the description of the engineering project must be such 
as to appeal to the banker who acts as the intermediary be- 
tween those responsible for industrial undertakings and the gen- 
eral investing public; and that the honest and capable engineer 

Lecture Notes. 


must be prepared to discriminate between immediate and final 

My experience with three senior classes is in accord with 
this theory. I have found the students more ready to acknowl- 
edge that commercial conditions control and limit engineering 
practice than they are to undertake the drudgery of preparing 
themselves to intelligently and efficiently meet this condition 
by familiarizing themselves with business methods. 

Summarizing my instruction on the Business features of 
Engineering practice I say — use your common-sense as cultivated 
and developed by your "Stevens" training; rely upon your rea- 
soning powers rather than your memory. 

And finally — Be true to yourselves and so be true to your 
Alma Mater. 

'<. II 



Lecture notes on engineering 
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